Tenet Healthcare Corp
NYSE:THC
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Tenet Healthcare Corp
Earnings Call Analysis
Q3-2024 Analysis
Tenet Healthcare Corp
In the third quarter of 2024, Tenet Healthcare reported impressive financial results, with net operating revenues reaching $5.1 billion—a notable increase driven by volume growth and efficient operations. The consolidated adjusted EBITDA grew by 15% year-over-year, achieving $978 million and reflecting a healthy adjusted EBITDA margin of 19.1%. The performance of the United Surgical Partners International (USPI) segment was particularly robust, with adjusted EBITDA of $439 million, which marked a 19% increase compared to the same quarter of the previous year. Same-facility revenues in this sector also rose by 8.7%, indicating strong underlying demand and operational effectiveness.
The company's success can be attributed to strong orthopedic volumes, with total joint replacements in Ambulatory Surgery Centers (ASCs) increasing by 19% over the last year. This growth is complemented by an increase in urology and GI procedures, signaling a trend toward more specialized care delivery. Tenet opened six new de novo centers in the quarter, including a significant partnership in San Diego to create a leading musculoskeletal outpatient surgery center—a strategic move that emphasizes their focus on expanding their presence in high-demand areas.
Turning to the hospital segment, adjusted EBITDA totaled $539 million, reflecting an 11% increase from Q3 2023. Same-store hospital admissions rose by 5.2%, underlining a strong utilization environment, while revenue per adjusted admission improved by 3.3%. This growth highlights Tenet’s ability to enhance operational efficiency as they expand capacity in a cost-effective manner. Overall, the hospital sector showed strong sequential growth, benefiting from a favorable payer mix and effective cost management strategies.
Looking forward, Tenet has revised its guidance for 2024. The company now anticipates consolidated net operating revenues between $20.6 billion and $20.8 billion, adjusted slightly downward by $100 million at the midpoint due to their recent divestitures, specifically the sale of Alabama hospitals. However, the adjusted EBITDA outlook has been raised by $50 million, now projecting a range of $3.9 billion to $4.0 billion. This indicates a growth of approximately 12% year-over-year, or 20% when adjusting for the impact of divested facilities. Notably, the USPI adjusted EBITDA guidance has been narrowed to $1.76 billion to $1.80 billion, while the hospital segment's projection has increased to between $2.14 billion and $2.20 billion.
The financial health of Tenet Healthcare is further demonstrated by its strong cash flow position, with the company generating $829 million in free cash flow during Q3. With a robust cash balance of $4.1 billion and no debt under its $1.5 billion line of credit, Tenet remains well-positioned to navigate future investments and shareholder returns. Year-to-date, they have repurchased 5.6 million shares for $672 million, reflecting confidence in their equity value and commitment to returning capital to shareholders.
Looking ahead to 2025, while providing limited specifics, Tenet indicates an expectation of continued growth in same-store volumes and operational efficiencies, with ongoing contributions from recent partnerships and M&A activities. The company emphasizes its capital deployment strategy will prioritize investments in healthcare facilities and service offerings, alongside an aggressive share repurchase program, suggesting strong confidence in enhancing shareholder value over the coming years.
In conclusion, Tenet Healthcare’s third quarter results reflect a resilient operating environment and robust demand for healthcare services. The combination of operational improvements, strategic investments in high-demand areas, and effective capital management positions the company to not only meet but potentially exceed future financial targets. Given the raised EBITDA guidance and strong free cash flow generation, Tenet appears to be on solid footing for continued growth, making it an attractive opportunity for investors.
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Good morning, and welcome to Tenet Healthcare's Third Quarter 2024 Earnings Conference Call.
[Operator Instructions]
I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may now 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 third quarter 2024 results as well as a discussion of our financial outlook.
Tenet 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 website, 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.
Thanks, Will, and good morning, everybody. Before we discuss our third quarter results, I'd like to take a moment to acknowledge and pay respect to those impacted by the hurricanes in our company, in our peers in those markets, and in our partners and suppliers who operate in those regions. The devastation is significant, but the energy to recover and rebuild shows the best of the American Spirit rallying together in a crisis.
Moving on to our results. Once again, our performance in the third quarter exceeded our expectations and represents a continuation of consistently strong operating results driven by volume growth and disciplined operations. In the third quarter, we reported net operating revenues of $5.1 billion. Consolidated adjusted EBITDA was $978 million, representing growth of 15% over third quarter 2023, and an adjusted EBITDA margin of 19.1%. USPI's results were once again strong with $439 million in adjusted EBITDA, which represents 19% growth over third quarter '23.
Same-facility revenues grew 8.7% and adjusted EBITDA margins remain robust. Orthopedic volumes are strong and total joint replacements in the ASCs were up 19% over prior year, coupled with the ongoing growth in urology and GI procedures. We did open 6 new de novos in the quarter, including a new partnership with Synergy Orthopedics establishing the largest dedicated musculoskeletal outpatient surgery center in San Diego, California. De novo development activity remains an important part of USPI's growth story and we have nearly 20 centers currently in syndication stages or under construction.
Turning to our hospital segment. Adjusted EBITDA was $539 million in the third quarter representing 11% growth over the third quarter of 2023 and importantly, strong sequential growth. The strong utilization environment remains with same-store hospital admissions up 5.2% as we continue to open up capacity in a cost-efficient way. Third quarter 2024 revenue per adjusted admission was up 3.3% over prior year, reflecting continued strength, acuity and mix. We've proven our ability to succeed in tough operating environments, leading the way in 2022 and 2023 in cost management in the aftermath of COVID and now in 2024 with robust demand where our efficient operating chassis has allowed us to deliver stronger results than expected throughout the year.
As such, we are continuing to make significant investments in expanding our network to support growth in our markets over the coming years. In July, we opened our newest hospital in Westover Hills, a rapidly growing area near San Antonio. The hospital is focused on procedural services with state-of-the-art operating rooms in cath labs, a large emergency department and an entire floor devoted to women's services. Additionally, construction of our next hospital in Port St. Lucie, Florida continues with an opening planned for 2025.
Turning to our full year 2024 guidance. We are once again raising our full year 2024 guidance to a range of $3.9 billion to $4 billion based on the fundamental organic outperformance in both of our business units. This represents an increase of $50 million at the midpoint of the range over our prior guidance increased and announced at the second quarter call. We've now raised our adjusted EBITDA guidance by nearly $600 million from our initial expectations this year.
Clearly, we are pleased with our strong performance throughout the year. I'd like to spend a little bit of time discussing our portfolio transformation. We completed the sale of our Alabama hospitals on September 30. All of the sales that we have executed on have been at high multiples to reflect the operational improvements that we have made to each of these facilities over the last several years. More importantly, as a result of these sales, our current hospital portfolio has an enhanced return profile more attractive geographies for us and our business model, higher expected returns on invested capital that should result. Conifer has retained and in many cases, expanded its relationship with the acquirers of the hospitals demonstrating the value we deliver to providers and revenue cycle management. While our hospitals are well positioned to benefit from a favorable operating environment, we've built a leadership team and a culture of operating discipline to be able to execute and deliver results during more challenging times as well.
The actions we have taken have enabled us to significantly improve our leverage ratio and we are committed to a deleveraged balance sheet going forward. After accounting for the tax payments that are still due on asset sales, our leverage ratio on an EBITDA minus NCI basis is around 3. We are very pleased with the deleveraging accomplished to date.
Looking forward, we are well positioned to create value for shareholders through stronger free cash flow generation. Our transformed portfolio provides us with a high degree of capital and financial flexibility. We will continue to deploy capital to enhance growth in our industry-leading ambulatory surgical business through M&A and de novo development, increased capital spending to fuel organic growth and return excess capital to shareholders via share repurchase given that we believe our equity continues to trade at attractive multiples relative to the market.
The combination of an established management team of focused strategy and consistent operations and disciplined capital deployment positions us to drive significant value for physicians, patients and in turn, our shareholders. And with that, Sun will now provide a more detailed view of our financial results. Sun?
Thank you, Saum, and good morning, everyone. Our financial results in the third quarter continue to be strong with adjusted EBITDA coming in well above our guidance range. In the third quarter, we generated total net operating revenues of $5.1 billion and consolidated adjusted EBITDA of $978 million, a 15% increase over third quarter 2023. Our third quarter adjusted EBITDA margin of 19.1% is up 220 basis points from third quarter of '23. These results were driven by strong same-store revenue growth, favorable payer mix and effective cost controls. I would now like to highlight some key items for each of our segments in the third quarter, beginning with USPI, which again delivered strong operating results. USPI's adjusted EBITDA grew 19% over last year, with adjusted EBITDA margin at 38.5%. USPI delivered 8.7% increase in same-facility system-wide revenues over last year with same-facility system-wide net revenue per case, up 7.6%, driven by high levels of acuity and favorable payer mix. Same-facility system-wide cases grew 1%.
Turning to our hospital segment. Adjusted EBITDA grew 11% with margins up 180 basis points over last year at 13.5%. Excluding the divested hospitals, adjusted EBITDA in our hospital segment grew 24% over third quarter of '23. Same-hospital inpatient admissions increased 5.2% and revenue per adjusted admission grew 3.3%, again demonstrating favorable payer mix and continued high acute levels. Our consolidated salary, wages and benefits were 43.3% of net revenues in the quarter, and our consolidated contract labor expense was 2.2% of SW&B, both substantially lower than the 45.2% and 3.1%, respectively, that we reported in third quarter of '23.
Next, we will discuss our cash flow, balance sheet and capital structure. We generated $829 million of free cash flow in the third quarter. And as of September 30, we had $4.1 billion of cash on hand with no borrowings outstanding under our $1.5 billion line of credit facility. We repurchased 795,000 shares of our stock for $124 million during the quarter. And year-to-date, we have repurchased 5.6 million shares for $672 million. As Saum mentioned, our leverage ratio as of December 30 was 2.2x EBITDA or 2.8x EBITDA less NCI, a substantial improvement from year-end, reflecting the proceeds that we received from our hospital divestitures as well as our outstanding operational performance.
Let me now turn to our outlook for 2024. For '24, we now expect consolidated net operating revenues in the range of $20.6 billion to $20.8 billion, $100 million lower at the midpoint versus our prior expectations due primarily to the sale of the Alabama hospitals. We are raising our 2024 adjusted EBITDA outlook range by $50 million to $3.9 billion to $4.0 billion reflecting the strong fundamental performance of our businesses, partially offset by the impact of the sale of our Alabama hospitals.
At the midpoint of our range, we now expect our full year '24 adjusted EBITDA to grow 12% over '23 or 20% when taking into account the impact of reduced EBITDA from divested facilities. At USPI, we have narrowed the range of our expected '24 adjusted EBITDA to $1.76 billion to $1.80 billion. And in the hospital segment, we are raising our '24 adjusted EBITDA outlook range by $50 million at the midpoint to $2.14 billion to $2.20 billion.
Turning to cash flows. We now expect free cash flows in the range of $975 million to $1.225 billion. This range includes the payment of about $875 million in net taxes related to our completed divestitures, including the recent Alabama transaction. Excluding these tax payments, this represents $1.975 billion of free cash flow at the midpoint of our '24 outlook or $1.225 billion of free cash flow less NCI, an increase of [ $50 million ] over prior expectations. As we've said before, the continued improvement in our cash flow performance has helped us deleverage our balance sheet while making [ different ] investments in our business and delivering value for our shareholders.
Now I'd like to spend a minute discussing '25. We are still conducting our business planning processes and evaluating key assumptions, and therefore, it's premature at this point for us to provide specifics on '25 guidance. However, we do want to give you some context for our current thinking about next year. First of all, there are 2 normalizing items that I would call out. We have reported $113 million of adjusted EBITDA in 2024 from facilities that we have divested and that will not recur in '25. In addition, we have reported $74 million of out-of-period favorable adjustments from supplemental Medicaid programs in Michigan and Texas in 2024. More than offsetting these 2 items at a consolidated level, we expect continued growth in same-store volumes and effective pricing, some potential additional revenue from Medicaid supplemental programs and continued strong operational efficiencies and disciplined cost controls.
We also anticipate further contributions from recent investments in [ partnerships ] in the hospital segment as well as from an M&A and de novo development within USPI. We look forward to completing the planning process and sharing guidance with you for '25 in February of our earnings call. And finally, as a reminder, our capital deployment priorities have not changed. First, we will continue to prioritize capital investments to grow USPI for M&A.
Second, we expect to invest in key hospital growth opportunities, including our focus on higher acuity service offerings. Third, we will evaluate opportunities to retire and/or refinance debt. And finally, we'll have a balanced approach to share repurchases, depending on market conditions and other investment opportunities. We consider our equity to be very attractive at the multiples at which it trades and see this as an opportunity to drive value for shareholders with our attractive free cash flow profile.
In conclusion, we're extraordinarily pleased with our strong performance in '24 and and the significant progress we have made with our portfolio transformation. We are confident in our ability to deliver on our increased outlook for 2024 as we remain focused on providing patient [indiscernible] our care in the communities we serve. And with that, we're ready to begin the Q&A. Operator?
[Operator Instructions]
Our first question comes from Josh Raskin with Nephron Research.
Just a couple of quick clarifications. I think the ASC segment guidance for USPI implies a drop sequentially in EBITDA that would obviously be seasonally very unusual. So I'm just curious if there's anything to call out there. And I think cash flow, if you could just tell us what the total tax payments in 4Q are going to be.
And then just my real question would be, could you just talk about changes or any changes that you're potentially seeing from managed care behavior?
Okay. There's three questions there. So let's handle them. Why don't we start with the -- I don't think that's accurate on the USPI point. So let's just try to clarify that first and the tax payments, and I'll talk about managed care.
Yes, Josh, this is Sun. For USPI EBITDA, we reported [ $439 million ] in Q3 and our guidance currently implies $500 million at the midpoint for USPI in Q4. So whatever -- what we see each year a Q4 upswing. In terms of tax payments...
I was looking at growth rates, so I screwed up the question. Sorry about that.
I see. Okay. on tax, as we put in our investor presentation, we have $875 million of total deal payments for the year, of which we expect to pay about $700 million in Q4 in addition with our kind of standard other tax payments.
Josh, on the managed care side, I'll probably keep the comments limited to what dialogue has been around 2 topics. One is just the impact of the 2 midnight rule and particularly in the Medicare Advantage space. And secondly, I think there's been discussions about the impact of managed care denials. Look, when it comes to 2 midnight, I think the process of adopting fully adopting the guidance on the 2 midnight rule in the Medicare Advantage market is what I would describe as still underway. I don't think it's been fully adopted.
At least for us, we have seen probably somewhere between 50 and 100 basis points contribution to our overall admissions growth, but certainly short of and with more work then there should be if the 2 midnight rule was fully adopted. And I guess at some level, that goes back to this issue of disputes and denials and other things. I mean, again, I can only speak about us. We're we're very disciplined and clean and compliant in the way that we document and code. And I do think that if you look at the last few years, the amount of activity that we've seen in the industry, increasing administrative costs on both sides for payers and providers related to disputes and denials has gone up in somewhat of an extraordinary way.
And it's certainly frustrating if you're sitting on this side of that activity. And at the same time, we have made the right investments and have the right capabilities and processes inside of Conifer [indiscernible] our clients, to have mitigated that impact relatively on what's been happening in the industry. But at some point, there has to be a solution to this because it's really just wasted administrative time and cost.
And Josh, this is Sun again. I think you also asked about USPI revenues sequentially. So Q3 was [ 11.39 ] for USP revenue and our guidance implies about [ 11.25 ] in Q4, so sequentially flat. I think 2 things. One is, it didn't change our USPI guidance, so we opted to leave both the EBITDA and revenues as they were. And then second, we also see, as you know, a pretty strong EBITDA margin increase in Q4. Again, historically, and we expect the same. So those are kind of the 2 pieces for the revenue and EBITDA guidance.
Yes. And look, we have been more fortunate in our ability to plan and recover given what happened from the hurricane standpoint, we had 148 facilities impacted and at some point, shut down. Only 1 of them at this point is still shut down. And so what we have done, we're confident that we will work on bringing back that business in the fourth quarter. we're confident that the margins will improve, and we've committed to our guidance for the year that we raised last quarter for USPI, and we're going to keep it for the fourth quarter and therefore, the full year from what we raised. And yes, it might make the numbers look slightly a little wonky there. But realize that we did have impact, but at the same time, we've made a decision that we think our operations will recover to the point where we'll be able to meet that guidance.
Our next question comes from Ben Hendrix with RBC Capital Markets.
I was wondering if you could provide a little bit more detail on your 2025 comments, specifically around growth in SS volumes next year. Is that the degree to which you see those continuing to kind of outpace historical trends? Is there any moderation assumed in there? And just your general thoughts on that momentum.
Yes. No, thank you. Good question for '25. We continue to see a strong demand environment. As we've talked about before, we do believe that the demand recovery, especially in the hospital segment, around the country continues as kind of the replacement of the early mortality that occurred from COVID in that demand environment. And I don't know when that's going to slow down to a more normal range. But currently, we still see that robust demand environment. And at the same time, we've spent the year working on cost efficiently, expanding our capacity in order to accommodate that volume so that we're not doing it with expensive contract labor, which really is a testament to our work in nurse recruiting that we have done this year through many of the terrific relationships formed with with schools around the country.
And so I don't -- I can't sit here today and say that we're forecasting some kind of a decline as we look forward. I mean as we think about our operations, moving from the fourth quarter to the first quarter, we're not thinking about them differently at this point.
Our next question comes from A.J. Rice with UBS.
Maybe I'll use Josh's approach. One clarification and then one question. Clarification being around the 1% USPI same-facility volume growth. That's a step-up from the first half. But you sort of alluded to maybe there was a little bit of impact from hurricanes in there. Just wondered if it was. And I know long term, you have a transition you're making towards higher acuity procedure that is helping on the revenue per case side but hitting a little on the volume side. Are you still in the midst of that? And what's the path to get back to 2% to 3%.
And then I just want to ask on your capital deployment. Thanks for laying the priorities there. But obviously, you're at a point where you've got strong free cash flow net, your debt is down to a pretty low level. So we're flipping around the discussion away from paying down more debt would say is there any to accelerate the pace of development in USPI to consider accelerated the buyback pace or even consider possibly a dividend or a larger deal out there?
Yes. Thanks, A.J. Just in terms of the clarification point, as we said at the beginning of the year, given the extraordinary comps from 2023, we thought we would move into positive volume territory later in the year, and that's kind of the pattern that you've seen, right, from Q1, Q2, Q3. We'll see what happens with Q4, given the point that I made in the prior question related to the hurricane impact. And yes, we continue to focus on growing acuity, which drives net revenue per case. It also drives extraordinary value in the system from an overall learning the cost of care standpoint. And we continue to look for opportunities where those transitions can happen in an orderly fashion to migrate certain lower acuity, higher volume type of activities out of the ASCs. I think that will continue for the next couple of years. As we had said from the beginning, it was a multiyear plan to kind of move some of those things out.
Look, you're right about capital deployment. Obviously, we're very cognizant of the free cash flow generation looking forward. One clarification, obviously, given the cash we have on our balance sheet, we've delevered, but the debt paydown opportunities are still ahead of us, which Sun and team will structure in very much the right way.
The second point I would make is despite our guidance, if you look at our history for the last 5 or 6 years, even before being in this vision, we've deployed more than our "200 to 250" in capital in the USPI given the larger deals that we've done, including the deal that we did in the first quarter of this year for 45 ASCs, plus what we've done otherwise. And so we continue to believe accelerating spend at USPI is the single most accretive thing to creating value within the company. And of course, as I noted in my comments and Sunday in his, we have, in fact, accelerated relative to the trend over the last few years, given our deleveraging and cash positions our ability to return value back to shareholders. So we -- I think they're very consistent. Your points are very consistent with our comments with the helpful added nuance that we have the flexibility to be more proactive and aggressive on each one of those dimensions at this point looking forward.
Our next question comes from Stephen Baxter with Wells Fargo.
I wanted to ask another one about the fourth quarter. I guess the hospital earnings cadence is a little different this year than we probably would have expected. Usually, hospital EBITDA is generally up in the fourth quarter versus the third quarter. It seems like you guys are guiding to a bit of a different cadence. So just wondering if you could help us ridge that. And then if there's anything unusual in the third quarter either positive or negative in the hospital business that we should be keeping in mind?
I mean, Sun can go through the numbers. But look, first of all, I think it's a very small change. I mean, first, we have a divestiture in there. That's the biggest thing. And the second thing is just from a seasonality standpoint, that's less pronounced in the hospitals than you would see in the USPI ambulatory surgery business. But look guys, there's a range there for a reason with upside to the range. And let's look at the trajectory of this year, it is obviously our goal on what may be a bit conservative there to continue to outperform. But I don't know if you want to address specific numbers.
Yes, I'll do a little bit. I think, Steve, last year, if you kind of look at our quarterly progression, our Q4 was up. But if you recall, we had about a $52 million out of [indiscernible] from California and tax that we called out. once you kind of normalize for that, it was fairly steady throughout the quarters. This year, if you look at our quarterly progression, we again had obviously, the HRA from Michigan out-of-period piece in Q1. We also called out an out-of-period $30 million from Texas Q2. So there's a bit of lumpiness in that. But we think our Q4 guidance is pretty consistent with our overall commentary on good margins, very well-managed operating cost and a good demand environment. And then the last part of your question, in Q3, we did not have any out-of-period or kind of onetime things that we are calling out.
Our next question comes from Ann Hynes with Mizuho.
Can you let us know just a supplemental payment amount in Q3 this year versus last year? And heading into 2025, you called out $187 million of EBITDA you have to come -- overcome, but I believe you said you've -- can you just confirm that you think you can offset that? And I think you said partly because of some of the Medicaid programs and strong volume growth and maybe highlight what you think could be incremental Medicaid payments in 2025.
Ann, it's Sun. Year-to-date in '24, we'll be at about almost $900 million of Medicaid supplemental fees year-to-date. The comparison to '23 becomes a little bit tricky because of all the divestitures in same-store hospital metrics. So we can maybe work with you off-line on that? And then, yes, in my commentary, we called out $113 million plus another $74 million from hospital divestitures and out-of-period Medicaid payments that we believe currently at this stage that we can more than offset at consolidated level through all the various things that we discussed.
On your question about supplemental payments for next year. I think it's too early to have specific comments. We're all aware of potential new programs in certain markets that we're all monitoring closely, and we're awaiting final decisions. So we'll obviously update as we find out more about that.
Our next question comes from Michael Ha with Baird.
So I see your hospital average on the day, I think it's the first time you've improved below 5 days number of 3 years. I was wondering if you could talk about what it will take to operationally get back to sort of pre-COVID levels, your expected time line, how we should think about the earnings benefit for hospital segment growth and margin expansion. And then in terms of the inpatient admin strength, I was wondering if you could sort of parse out the sources of that strength and the durability of that going forward.
Well, on the length of stay piece, I appreciate you're calling out the improvements that we've made. This has been our initiatives in length of stay management, which started in a new fresh form in 2022 and '23 in order to manage contract labor, excess contract labor costs have continued in this environment because we think it's important, and we're pleased with the results we're getting there. But I would make a comment similar to kind of my comments in the past about we don't spend a lot of time trying to chase the exact mix and volume that we had pre-COVID. I mean the same thing is true in length of stay, right? As our acuity goes up, you would expect length of stay to increase a bit from pre-COVID acuity levels and therefore, lengths of stay that were a bit lower.
So our fundamental driver strategically in the business is to continue to build our high acuity business which we think is uniquely suited and sustainable to get to your second point, from a demand standpoint, durable in terms of inpatient admissions. And within the context of taking care of those patients appropriately, we look to optimize length of stay relative to metrics that are out there like geometric mean and other things. Look, on the broader comment, I will just echo what I said earlier in the call, which is we're pleased with the demand environment today. We feel positive about it looking forward and even into 2025. As I said, I don't -- we're not planning differently for the first quarter next year versus the last quarter of this year in terms of a robust demand environment. We're not seeing signs or signals that we should stop looking to add capacity selectively in markets where that demand could be serviced in an appropriate cost structure, et cetera. So I feel pretty good about that. The inpatient and hospital-based demand strength is really -- it's both urgent and we're seeing nice success in some of our critical service lines, cardiovascular and other, in particular, specialty surgical areas. So the drivers are both urgent and elective business.
Payer mix obviously has been very helpful this year driven very much so by commercial and even more significantly by exchange strength. And that goes to not only the market, but our contracting strategy, which has been very inclusive of being in a broad range of exchange networks.
Our next question comes from Pito Chickering with Deutsche Bank.
Medical admissions has continued to outpace surgical admissions. So how durable do you think that is? Or is it get past a Medicaid [indiscernible], do you think that surgical admissions normalize next year as comps get easier. And then a quick verification on hurricanes. You talked about the facilities impacted. Did you quantify a revenue impact from hurricanes in the fourth quarter?
Yes, Pito, we're going to have to ask you to repeat the first question in a second. But I would just -- rather than us spending time focused on the details of the hurricane impact. Look, we had 148 centers affected. We've got all but 1 running. We're expecting fourth quarter, higher acuity, better mix, therefore, better margins, and we're maintaining our commitment to our guidance that we raised at the end of the second quarter. The first question got -- it's either the connection or something, it was a little bit jumbled. Do you mind repeating that one more time for us?
Yes. You bet. Apologies. I'm in a hotel room. Medical admissions continue to outpace surgical admissions this quarter. How durable is that. Or do you think as we get past Medicaid reiteration, do you think that surgical admissions accelerate next year as comps get easier after this year's Medicaid [indiscernible] determination?
Yes. Got it. Okay. Well, yes, the medical admissions are reflective of 2 things. Obviously, one is just our continued commitment to emergency department excellence in terms of services, wait times and receiving ability from that standpoint, including how we manage our house to avoid our facilities ever being on diversion as a commitment to the community. We also have improved our ability to receive transfers from other hospitals for sick patients, intensive care patients which result in medical admissions oftentimes from outlying hospitals. And so we're not surprised by that. I mean this is -- again, fundamentally, these priorities are part of our strategy to continue to build and grow high acuity, elective and emergent care, including in the medical cases. I would also point out that medical admissions, not just surgical admissions have been pretty strong in the commercial environment, including for exchange participants.
And of course, that raises the question of both the exchange growth impact, but also some utilization benefit that comes from exchange -- new exchange participants picking up more attractive coverage.
Our next question comes from Justin Lake with Wolfe Research.
First, a quick follow-up on '25. I just want to make sure I heard correctly that with all the puts and takes and the headwinds in terms of the year-over-year comp, you still expect to grow EBITDA year-over-year? And then my real question is on leverage. Now that you've completed the deal, I was wondering if you could share a target leverage ratio you expect to get to once you deploy the capital? And if you aren't ready to share that now, any thoughts on when you might be able to communicate that number.
Yes. Justin, just 2 real quick answers. The first is, yes, I think Sun's comments that we expect to more than offset normalized numbers. And we'll go through a full description of the puts and takes, obviously, when we provide guidance. But at this stage, our work indicates that we should more than offset that. We're not ready to -- I mean, I think my comments in the leverage section around we are pleased with where we are from a leverage standpoint is probably the most that we're going to say at this stage rather than having a formal guidance number, but I think you can read into that, that we're pleased with where we are from that standpoint. And again, our -- my commentary on debt paydown still stands, which is working through the best ways to do that is something that we're actively in the midst of doing.
Our next question comes from Joanna Gajuk with Bank of America.
I guess the follow-up I would have on capital deployment comments around the ASC acquisitions. Any commentary there in terms of multiples? Or is there more competition or less in terms of what you end up paying for these deals when it comes to multiples? And are there larger assets to be acquired? I mean, it sounds like maybe there will be there. But the other actual question, I guess, on the guidance for this year. The hospital revenue guidance was reduced by $100 million, call it, the midpoint. So I assume this is the Alabama Hospital. So -- but there's also higher, I guess, same-store inpatient admissions. And I don't want to bring up the hurricanes again, but just to make sure, was there any impact from hurricanes in Q4 that you had assuming here, too?
We'll split up the questions here. The ASC business capital deployment and really the question being about multiples I would just step back and remind the audience, we're focused on our post-synergy multiples. And because of our ability, collectively, in the organization to drive to better management, more efficiency, network inclusion, supply chain efficiencies, et cetera, we often are able to buy assets and reduce the effective multiple within the first couple of years from that standpoint. And we're -- again, we're focused on what the effective multiple is at the end of that period rather than what we're paying for it.
Now actually speaking, we have not seen changes in the purchasing multiples of any note recently. I know this question comes up from time to time. We have not seen any type of changes. And so we are consistently guiding to the same pre and post acquisition multiples that we have in the past. And that's a good thing in terms of the availability of attractive high-quality assets that are choosing to become part of the USPI portfolio. Do you want to cover the hospital, hurricane.
Joanna, on our hospital revenues, we still believe good demand environment, good pricing environment, high equity, all those things that we've talked about. Our Q4 revenue guidance, the reduction is all primarily driven by the divested hospitals, and we don't have any material impact in there for any hurricanes.
Next question is from Whit Mayo with Leerink Partners.
So I'm just curious with the size of the acute care portfolio, obviously, much smaller than in the past. How are you thinking about the underlying infrastructure and cost that you need to support the business going forward? And I had just one other quick one, you didn't call out any of the ongoing accretion to Conifer from the hospital sales as an offset in '25. So I just was hoping you could address that.
Okay. With one more time, the second part of that, the offset?
Well, the accretion that you're getting to Conifer from the hospital sales considering you don't eliminate the earnings and the reporting going forward. Just [ to say ] an ongoing offset as we think about '25.
Right. Yes. Okay. Got it. So let's start with the size of the acute care portfolio. Obviously, it's been reduced, and we would typically, on an ongoing basis, make adjustments, obviously, to the corporation from that perspective. Remember, in the period after divestitures, we tend to have transition service agreements that support the divested hospitals for a significant period of time. And so the way we think about these things is that we ought to support those transition hospitals with our sales partners very thoroughly and differently than if we were owning them and that's not the least of which because we also have some longer-term Conifer relationships with these folks. So out of respect to what we do there, we take that job very seriously. And again, I would just reiterate that we are cognizant of the opportunity there overall from that standpoint.
Obviously, there are costs that are simply direct allocations to these markets that go away as part of what we sold. I mean, that's not surprising, the chassis certain purchase services contracts and other things would come down naturally as you would expect with asset sales. On the offset, Sun.
Yes. On Conifer, yes, as you noted, and as Saum has discussed several times before, we have long-term revenue cycle relationships with a lot of our divested sites. Going to '25, we do expect those to be a benefit to us. In terms of actual specifics, again, we'll have more information when we give our guidance to '25, but that is part of our overall expectations.
Our next question is from Andrew Mok with Barclays.
Maybe if I could just follow up on that last question first. I understand that in cases where you expand the relationship of Conifer, there would be an incremental contribution to EBITDA. But if you do not expand the relationship, are you saying that there's still an incremental enterprise EBITDA contribution from those divestitures?
Yes. Andrew, no, you're right. It's the expanded opportunities that we're mostly referencing in terms of '25 factors.
Yes. And the other thing, I don't mind calling out, look, there's -- we've talked about some of the expansion opportunities. One of them in particular will be larger than others, which will require us to take on a significant amount. So I would think about that almost as a new customer acquisition in terms of what the margin profile would look like for Conifer in the outside market and again, as Sun said, we'll put more detail to that as we give 2025 guidance. But we will make investments in order to onboard that business in 2025 before getting to our overall typical performance with Conifer over time.
I would say, for the rest of the divestitures, the expansions that we've done are a little bit more straightforward to onboard from that perspective. But it's a great story for Conifer in terms of these expansions.
Our next question comes from Brian Tanquilut with Jefferies.
Congrats on the quarter. Saum, in your prepared remarks, you talked a little bit about efficiency opportunities that you still see in the business. So as we think about the hospital segment and where margins stand today and with the divestitures that you've done, how much runway do you think you have left for margins? Or is it right to think that 15% segment level EBITDA is about the right side?
Well, I think without getting into specific numbers, I mean, from efficiency opportunity standpoint, one of the things that we are focused on including being a little bit different than some others is capacity utilization, especially in high-value real estate in the hospitals, right? And our ability to continue to improve the capacity utilization of our facilities for us represents -- just to give you one example, represents how we think about that ongoing efficiency opportunity. And so we're not -- again, our mindset is not, whatever the number is, to be satisfied with what the margins look like today. Obviously, ongoing improvements in labor supplies and other expenses, third-party purchase services, et cetera, stabilization of the staffing environment, the physician staffing environment, et cetera, all present opportunities looking forward to continue to try to optimize the business. But I would say that, as an example, that area of capacity utilization is still an important one to us from the standpoint of finding more efficiency.
Our next question comes from Matthew Gillmor with KeyBanc Capital Markets.
I wanted to hit on the total joint replacement growth at USPI. I think you're up 19% this quarter and if we look at your disclosures, there was sort of an acceleration into the sort of 20% range starting last year and sustaining. So just wanted to see if you have any perspective to share with respect to the sustainability of that level of growth and maybe how that ties into your development pipeline on the USPI side.
Well, I think that -- I mean it's no secret that sometime around 2020, we -- or even before, we made a decision that we wanted to be the unquestionable leaders in outpatient bone and joint care, more broadly, bone, joint, spine, et cetera, with a full range of outpatient-based services. We believe and I think what we're seeing is that we can provide those services in a high-quality manner at a lower cost than in other settings. And I think that the industry has moved pretty heavily towards outpatient-based care.
Some of that care is still in the hospital outpatient-based environment versus in the freestanding environment. We still think there's migration opportunity over the next few years into the freestanding environment. Obviously, with the burden of chronic illness that we see in the country today, there are people that will need hospital-based outpatient services simply because of chronic condition management and appropriately providing those services. But the reality is with all of these things that move into a lower cost, higher service setting, it's not a direct cannibalization.
The market expands and the market has been expanding for these services when you can offer it in an ambulatory setting. And so we're focused on that more than anything else is continuing to expand the marketplace, continuing to get younger and younger orthopedic surgeons who aren't exposed to ASCs in their training exposed to ASCs earlier in their careers to show them that this is a very viable place to practice.
Our next question comes from Sarah James with Cantor Fitzgerald.
Ambulatory 2024 guide shifted about 100 to 150 basis points to be more revenue per case than volume compared to the 2Q 2024 guide. So is this how we should think about mix going forward with revenue per case being the larger driver compared to volume given your comments on the durability of trends around commercial mix and migration of low acuity out of ASC. And then just a quick clarification. On the year-to-date DPP, what's the mix between ambulatory and hospital. We're just trying to get to a clean revenue per case number?
Thanks for the question. We'll split them up again. But I think on the first question, look, there's a couple of things here that are important to put into perspective. First of all, I think that guidance is relevant for the rest of '24, right? We haven't said anything about '25 and how we're thinking about that with respect to our business planning. And I understand there's a lot of puts and takes. I mean one of the reasons we're really pleased with the net revenue per case growth in the acuity growth USPI is because remember, we added 45 centers and more than that this year, but that 45 center tranche that was heavily nonorthopedic at the beginning of the year, and therefore, had lower average net revenues per case than in a truly orthopedic dedicated center. And yet, we -- and we haven't gone into that detail because we're not breaking out different segments of USPI. But the concept is important that we're outperforming our expectations in that acuity growth even as we continue to add centers from a -- especially when they come in large chunks like that from a more modest acuity standpoint. So I would think about the guidance for the rest of '24, we'll get to '25. But again, I would echo the answer to the question about tailwinds in this part of the business around we see a healthy long-term growth rate in bone and joint care and ASCs.
And Sarah, this is Sun. Just on your second question. I would consider virtually all of the DPP amounts related to the hospital segment, just given the different patient mix and payment mix in across the 2 segments.
Our next question is from John Ransom with Raymond James.
I'm going to take a shot at too, and you guys just pick your journey since that seems to be the -- what people are doing. So the first one is when we look at the expansion in the health exchanges this year, can you quantify the effect of that on USPI, if any? And then secondly, I mean, Saum, you're probably tired of answering this, but are you saying that on a same-store basis in '25, we should expect total state directed payments to increase over '24? Are you not quite prepared to say that?
Yes. We haven't made any forecast for '25 on state directed payments on a relative basis to '24. Obviously, if you compare to '23, we would expect that '25 is going to end up being higher than what it was back then. But the year-over-year, we haven't gotten to -- in the '23 to '25 step up is obviously more structural from that standpoint. Do you want to cover the [ HICs ]?
Yes, sure. John, on HICs, the broader trends, I think, are certainly applicable across hospitals and our ambulatory space. We haven't really quantified the USPI component of it. I do think it is probably smaller, relatively speaking, impact on ambulatory versus what we see in hospitals. And while we're talking about it, I can just remind everyone on Q3 for hospitals, we continue to see about a 58% increase in exchange volume year-over-year for Q3. So still very significant for us.
It's been a benefit to the business all year absolutely.
Absolutely.
Especially because of our contracting strategy being inclusive in the networks.
Our next question is from Jamie Perse with Goldman Sachs.
Can you talk a little bit about the unconsolidated ASC portfolio for a minute? Just looking for an update on where some of those facilities are at from a development and ramp perspective. how you're thinking about potential increases in ownership of those facilities going forward?
Yes. No, Jamie, we have -- we've cut out of the bit of reporting exact numbers and other things on this as we've kind of gotten into a more stable environment after the 2022 discussion there. But yes, we continue to have buy-up opportunities. We continue to execute on buy-up opportunities within the portfolio. And it's a small, but at least on a consolidated basis, additive part of our ongoing work.
Obviously, sometimes when we do that, we unlock the ability to add new business development resources for growth or other types of synergies from that perspective. But yes, it's a small, but it's not as big an opportunity as it was in the past because a lot of that stuff has been executed on.
We reached the end of the question-and-answer session. I'd now like to turn the call back over to management for closing comments.
That's all for today. Thank you all very much. If you have any follow-up questions, certainly feel free to reach out to me, and thank you very much for joining our call today.
This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.