Prepared remarks
Welcome to Tenet Healthcare's second quarter 2026 earnings conference call. After the speaker's remarks, there'll be a question and answer session for industry analysts. To enter the queue, please press star one on your telephone keypad at any time. 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. 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 2026 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. With that, I'll turn the call over to Saum.
Thank you, Will. Good morning, everyone. We continue to deliver results exceeding our goals based on the fundamental performance of our business. Hospital volumes and same-store revenue growth in both segments are strong, reflecting our commitment to higher acuity and value for payers. Margin strength is supported by timely execution on our technology-enabled expense management plans that we described at the very start of the year. Second quarter net operating revenues were $5.6 billion, and consolidated adjusted EBITDA was $1.304 billion, which represented an adjusted EBITDA margin of 23.2%. Consolidated adjusted EBITDA grew 16.3% over prior year. Year to date, our fundamental outperformance totals approximately $97 million across both segments. Adjusted diluted earnings per share increased 52% to $6.12 in the second quarter of 2026 compared to prior year. As we noted last year, we are operating in a dynamic environment characterized by payer mix shifts and insurance enrollment uncertainty in both the exchanges and Medicaid. Despite these challenges, the growth and expense initiatives that we had planned and have implemented and continue to focus on enabled us to deliver a clean quarter. We are optimistic about the rest of the year and are increasing our revenue, adjusted EBITDA, and cash flow guidance for 2026. USPI generated $542 million in adjusted EBITDA, which represents 9% growth over second quarter 2025 and 25% of our full year 2026 adjusted EBITDA guidance for USPI. We are pleased with USPI's continued outperformance, as we set an aggressive EBITDA target as a percent of the full year for the second quarter that we were able to exceed. Same-facility revenues grew 5%, as our high acuity strategy continues to yield benefits and is highlighted by 10% same-store volume growth in total joint replacements in the ASCs over prior year. We have a robust pipeline of partnerships interested in joining USPI this year. USPI is the premier ambulatory surgical asset in the space and the leading provider of low-cost, high-quality care that benefits all stakeholders across the healthcare ecosystem. Turning to our hospital segment, second quarter 2026 adjusted EBITDA was $762 million, which was well above our expectations and represented 22% growth over second quarter 2025. We reported 18% adjusted EBITDA margins in the quarter, which were driven by strong volume growth, disciplined expense management, benefits from growth initiatives, which were partially offset by the expected impact of reductions in exchange enrollment. These drivers were ahead of our core assumptions and contributed meaningfully to our outperformance in the quarter. Importantly, we continue to see attractive growth in our commercial managed care revenues. Regarding the exchange marketplace, exchange revenues have declined a significant 17% compared to second quarter of 2025. We are seeing highest impact in states like Florida, Arizona, Michigan, South Carolina, and Texas. In light of the challenges that the decline in exchange enrollment presents, we are flexing our cost base and building an appropriate baseline on which to grow in the future with a focus on continued margin strength. Our consistent results are driven by a transformed portfolio of businesses, continued strategic focus on higher acuity specialty services, strong leadership at the local level, and an ability to effectively manage through the current dynamic environment. It's important to note that year-to-date Conifer results are in line with our prior expectations, and we continue to manage through the conclusion of a third-party contract. We have also capitalized on our compelling valuation and deployed $1.36 billion to repurchase 7 million shares in the first half of 2026 with 5.7 million of those shares repurchased in the second quarter. The positive impact on EPS is significant as we look forward to the rest of the year. As we did note in our press release, the board of directors has authorized a $2 billion increase in our share repurchase program. We expect to continue to be active in share repurchase over the balance of the year. Turning to 2026, the guidance that we established at the beginning of the year was robust, given the dynamics the industry was facing, but so were our plans for realizing results from our recent growth investments and our expense and AI initiatives. At this point in the year, we are raising our full year 2026 adjusted EBITDA guidance to a range of $4.83 billion-$5.03 billion, which represents an increase of $295 million or 6% at the midpoint of the range over our prior guidance. The guidance increase is differentiated and primarily supported by fundamental strength in our businesses and our expectations for continued growth into the second half of the year. As we note in our adjusted EBITDA bridge in the investor deck, our guidance raise is supported by approximately $100 million of fundamental outperformance in the first half of the year and an additional $60 million through a continuation of those fundamental drivers into the second half of the year. Additionally, based on the ambulatory surgical acquisitions that we have made so far this year and the robust pipeline of deals that we see ahead, we now expect to exceed $300 million in full year M&A spend in 2026. We are confident in our ability to achieve our increased guidance as it is powered by continued strengths in our core business drivers, same store revenue growth, effective expense management, and strong free cash flow. For more details on our results in the quarter and our guidance looking ahead, I now turn it over to Sun.
Thank you, Saum, and good morning, everyone. We delivered strong performance in the second quarter of 2026, generating total net operating revenues of $5.6 billion and consolidated adjusted EBITDA of $1.304 billion. Second quarter adjusted EBITDA margin was 23.2%, driven by strong revenue performance and disciplined operating expense management, with continued progress on the growth and cost efficiency initiatives that we outlined at the beginning of the year. I would now like to highlight some key items for both our segments, beginning with USPI. In the second quarter, USPI's adjusted EBITDA grew 8.8% over second quarter of 2025 at $542 million, with adjusted EBITDA margin at 39%. USPI delivered a 5% increase in same facility system-wide revenues, with net revenue per case up 6.3% and same facility case volumes down 1.2%, reflecting our high acuity focus. Turning to our hospital segment, second quarter 2026 adjusted EBITDA grew 22% to $762 million, resulting in an adjusted EBITDA margin of 18%. Same hospital inpatient adjusted admissions rose 2.6% in the quarter, a sequential improvement from first quarter and further validation that the demand environment remains healthy as we expected. Revenue per adjusted admissions increased 3.3% year-over-year in Q2, reflecting the work we do to grow acuity, as well as an increase in supplemental Medicaid revenues, partially offset by the impact of reduced exchange volumes. Exchange revenues declined 17% from second quarter 2025 and represented about 5.5% of consolidated net operating revenues in second quarter of 2026. Finally, we recognized $92 million of favorable out-of-period supplemental Medicaid revenues related to prior years in the second quarter. In the second quarter of 2025, we had $70 million of favorable impact related to prior years. We had not assumed any of this favorability in our initial guidance for 2026. I would note that we had a clean beat in the quarter even without these incremental Medicaid revenues. We continue to demonstrate our ability to manage through a dynamic period for providers, delivering strong results despite the headwinds that the industry faces. We will discuss our cash flow, balance sheet and capital structure. We generated $444 million of adjusted free cash flow in the second quarter, which brings us to $1.422 billion of adjusted free cash flow year to date. As of June 30, 2026, we had $2.17 billion of cash on hand with no borrowings outstanding under our line of credit facility. Additionally, we have no significant debt maturities until late 2027. Finally, during the second quarter, we repurchased 5.7 million shares of our stock for $1.04 billion. Year to date, we have repurchased almost 7 million shares of our stock for $1.36 billion. As Saum noted, the board of directors has authorized a $2 billion increase in share purchase authorization, again, reflecting confidence in our strategy and our ability to execute over the long term. Our leverage ratio as of June 30, 2026, was 2.33 times EBITDA, or 2.9 times EBITDA less NCI, driven by our strong operational performance and financial discipline. We remain committed to maintaining a deleveraged balance sheet and believe that we have significant financial flexibility to support our capital deployment priorities and continue to drive shareholder value. Let me now turn to our outlook for 2026. For fiscal 2026, we now expect consolidated net operating revenues in the range of $21.9 billion-$22.5 billion, an increase of $300 million at the midpoint of the range over prior expectations. As Saum mentioned, we are raising our 2026 adjusted EBITDA outlook range by $295 million at the midpoint to $4.83 billion-$5.03 billion, reflecting the strong fundamental performance of our businesses. At USPI, we are now expecting 2026 adjusted EBITDA of $2.16 billion-$2.22 billion. In hospitals, we are raising our 2026 adjusted EBITDA outlook range by $285 million at the midpoint to $2.67 billion-$2.81 billion. This increase is driven by fundamental improvements in our operations that benefited our results in the first half of the year, and that we expect to continue into the back half of the year. In addition, we now expect a contribution of $140 million from recently approved increases in certain supplemental Medicaid programs, plus the out-of-period revenues from prior year that I already mentioned. Of this $140 million, about $20 million is expected in the second half of our fiscal year. Finally, we expect third quarter 2026 consolidated adjusted EBITDA to be in the range of 23%-24% of our full-year consolidated adjusted EBITDA at the midpoint. We expect third quarter 2026 USPI EBITDA to be in the range of 24%-25% of our full-year USPI adjusted EBITDA at the midpoint. Turning to our cash flows for 2026, we now expect adjusted free cash flow after NCI in the range of $1.825 billion-$2.055 billion, an increase of $225 million at the midpoint from our previous guidance range. This guidance range includes the payment of about $150 million in tax payments this year from the Conifer transaction. Excluding these tax payments, this would represent $2.1 billion of adjusted free cash flow after NCI at the midpoint of our 2026 outlook. We remain focused on strong free cash flow conversion from our EBITDA performance, including the continued outstanding cash collection performance of Conifer, while continuing to invest in high-priority areas of our businesses. Turning to our capital deployment priorities, we are well-positioned to create value for shareholders through the effective deployment of free cash flow. First, we will continue to prioritize capital investments to grow USPI through M&A. As Saum noted, we have made good progress so far this year and have a number of future opportunities to support our expectations for USPI M&A in 2026. Second, we expect to continue investing in key hospital growth opportunities to fuel organic growth, including our focus on the higher acuity service offerings. Third, we'll continue to be active in share repurchases as we continue to see significant opportunities. Finally, we will continue to evaluate opportunities to retire and/or refinance debt. We are pleased with our continued effective execution and remain confident in our ability to deliver on our increased outlook for 2026. Our transformed portfolio of businesses is delivering more predictable results, and our capital efficiency is enabling us to create shareholder value through effective capital deployment. With that, we're ready to begin the Q&A. Operator?
Questions and answers
Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. Star 2, if you'd like to remove your question from the queue. As a reminder, Tenet respectfully asks that analysts limit themselves to one question each. One moment while we poll for questions. Our first question comes from Craig Hettenbach with Morgan Stanley. Your line is now live.
Yes, thank you. Saum, I wanted to dig into the work that you've done on the cost structure that's driving this margin expansion, despite some of the industry headwinds, including the exchange. If you can just provide some examples of some of the things that are kind of playing out in the margins, that would be great.
Sure. Thanks, Craig. I think there's three or four things that are probably important to consider here. One is just traditional search for efficiencies that one would imagine, including our more traditional productivity strategies, contract renegotiations on purchase services, supply standardization. Things that are part of our toolkit that we're doing all the time, that, as I indicated at the start of the year, about a year ago, June, July of last year, we began planning so that we could hit the ground running, executing on January 1 of this year. The second category is more clinical operations cost improvement. We really didn't feel that category one would be adequate to sustain us through the next few years. We put increased effort into length of stay management, service level management in the emergency department, and throughput in the hospital. Scheduling efficiencies and better utilization of our operating room and cath lab assets, both in the hospitals and the ASC business, were additional initiatives. These are more complex and require behavior change and process redesign, but are very important. The secondary benefit of that work, of course, is that it supported service levels for patients and physicians, especially in the emergency department area, so that it's easier for them to gain access. The third area is technology-driven work, both automation and AI, combined with what we are doing in our global business center. The deployment of these technologies has been both domestic and in the global business center. It helps to improve productivity. In some cases, it can literally automate or replace work. Over time, we are seeing the benefit in our core cost structure in those areas, not just in the payments arena, but also in some of our support overhead structures at the facility or the corporate level. Really, all three of those areas were things that we had planned or spent time planning last year. I think the benefit we're seeing is we were just able to hit the ground running on execution in January. It has accrued into the business over these first two quarters.
Helpful color. Thank you.
Our next question comes from Benjamin Rossi with J.P. Morgan. Your line is now live.
Great. Thanks for taking my question. I just wanted to turn to the ambulatory segment for a moment. Given the strength across revenue per case to start the year, I appreciate some of the moving pieces in your 3%-6% top-line growth expectation. I know the press release cited acuity and service mix, could you just walk us through puts and takes going into expectations for that segment? How are you thinking about service line expansion opportunities this year and some of the more promising specialty areas on your radar? With the inpatient-only list, are you seeing any lift to start the year across either volumes or pricing from this first tranche of MSK procedures rolling off? Thanks.
I think from a service line standpoint, we continue to focus on pushing the envelope of clinical appropriateness in the ambulatory surgery setting and doing it safely. Orthopedics, expanding the range of orthopedics, is obviously supported by some of the changes in the inpatient-only list. Those programs continue to scale. As we've indicated, we have seen success with our physician partners in urology. Our robotics program continues to expand significantly. When I say robotics, I'm not just referring to orthopedics. I'm talking about core general surgical robotics work that we see as important. We see increased activity in bariatrics, as we have indicated over time, and a steady but gradual move into the cardiovascular space, which will take some time. The other thing we've done after studying the spaces over the last couple of years is started to increase acuity in some of the more core legacy service lines. In particular, GI and ophthalmology—we've started to push further into higher acuity procedures, such as duodenal endoscopy and associated procedures and biopsies, and retinal specialization in the ambulatory surgery center. These expand the array of services in some of those core service lines, in addition to the surgical frontier service lines that have a lot of growth in front of them.
Our next question comes from Matthew Gillmor with KeyBanc Capital Markets. Your line is now live.
Hey, thanks for the question. I wanted to ask about the exchange performance. I appreciate you didn't change the guide. I was curious how things played out relative to your expectations in terms of the decline in the revenues and the volumes, patients shifting over to commercial coverage or becoming uninsured. Any commentary there will be great. Thanks.
Yeah, go ahead, Sun. Do you want to—
Hey, Matthew, it's Sun. First of all, just resetting on the metrics, I may have said in my prepared remarks about exchange volume, I meant exchange revenues in the quarter were down about 17%. Exchange volume admissions were down about 13.5%. I would say both of these metrics were roughly in line with our expectations for the quarter. As we exited Q1 into Q2, we expected, after the grace periods, for exchange erosion to increase, obviously from Q1 to Q2. We expect the overall market trends that we saw in Q2 to roughly continue into Q3 and Q4, which is why we didn't change our guidance. This all resulted in about a $65 million revenue headwind on exchanges in our Q2 numbers, which we were able to pivot around from an OpEx standpoint as well as through other growth initiatives and deliver results. The only other thing I would add is we are roughly seeing a pretty consistent conversion from exchange patient volume into uninsured on a nearly one-to-one basis. We did see a proportionately equal increase in uninsured volumes in our Q2 as well, and we expect that to continue into the second half.
Great. Thank you.
Our next question comes from Stephen Baxter with Wells Fargo. Your line is now live.
Hi. Thanks. I wanted to ask about the revenue per adjusted admission trend in the second quarter. It improved a lot from where it was in the first quarter, the softer number that you posted then. Can you help us unpack the factors that are driving the improvement? In the release, you cited strength in the commercial book as a call-out. Is there something happening there above and beyond the normal price rate increases we've come to expect in that part of the business? Thanks.
Go ahead, Sun. I don't think there's anything abnormal there.
Hey, Stephen. On the revenue per adjusted admission, we did see softness in Q1, which at that point we said we thought was a temporary Q1 artifact and that we thought our long-term acuity strategy would play out. In Q2 it did. The moving pieces we would highlight are twofold. One is we did have out-of-period supplemental payments of $92 million, but we had $70 million in the prior Q2 of 2025, so a relatively small net impact. Probably the largest headwind in our revenue per adjusted admission was the exchange revenue movement, and that represented almost a 2% headwind in the quarter. We were very pleased with our overall acuity. It goes right in line with the commercial volume increases. I don't know that there's anything special to call out beyond that.
Our next question comes from Pito Chickering with Deutsche Bank. Your line is now live.
Good morning, guys, and thanks for taking my question. Looking at the ASC volume weakness this quarter, how much is tied to HIX and slower elective versus your focus on higher acuity procedures? Did you see any geographical differences in electives across your portfolio depending upon the HIX exchanges? The overall demand sort of still there across your portfolio, as you think about your broad base? Last part of this multi-part question here, looking at your inpatient surgeries, how much of that did you capture in your ASCs versus weakness in inpatient?
From our perspective, the ASC volumes were strong because we're focused on growth in our high acuity service line priorities, like joint replacements where we saw 10% year-over-year growth. Given how large our portfolio has become, that's outstanding. The vast majority of the impact continues to be a migration of lower acuity, quick pain procedures and other cases into the office setting or deliberate migration of those cases. We're pleased we continue to deliver strong revenue growth, 5% in the quarter, consistent with our strategy. On geography, surgical business overall, where we saw pressure on the elective side primarily in the hospitals, tracked with some of the states I described earlier where we're seeing the highest impact from exchange enrollment declines. We had strong emergency department volume and emergency department inpatient surgeries. Our elective surgery book was under more pressure on the inpatient side, but elective outpatient surgeries in the hospital outpatient department were actually quite strong. I attribute that to investments we've made in hospital-based outpatient surgical programs and the work we've done alongside USPI. That investment was an offset to what impact you might have seen from the exchanges.
Great. Thanks so much.
Our next question comes from Whit Mayo with Leerink Partners. Your line is now live.
Hey, thanks. You guys are going to have a lot of cash in the next few years. The leverage is pretty low. You've upped the buyback. Just any comments around targets for buybacks this year, other areas for capital deployment that we should expect, and maybe thoughts on where your head is around a potential dividend?
Thanks, Whit. At a high level, I'll reinforce Sun's commentary. We think at compelling valuations, given our growth prospects and continued expansion of our USPI portfolio, share buybacks are an attractive use of free cash flow. Our hospital business continues to show good returns from margin improvements and volume in our strategic growth initiatives. We'll continue that path. We're a bit more cautious on large-scale hospital builds until we understand the market environment and expansion opportunities. We've been focused on one to two per year recently and are being cautious to ensure market conditions are right. Otherwise, our investments in the segment continue to be strong. We will continue to deploy capital into USPI as noted. Sun, anything to add?
No, I would add two things. One is, as we look forward on our debt position, maturities are spread over the next several years and well within our ability to refinance or pay down. We're comfortable there. Second, when we look at our free cash flow yield, we feel our shares are still well discounted based on that metric. That supports continued buybacks. Thanks for your question.
Yeah, thanks.
Our next question comes from A.J. Rice with UBS. Your line is now live.
Thanks. Hi, everybody. Maybe two things real quick. I appreciate the bridge and the slide deck. There's a lot of focus on core growth. If I'm looking at the slide that has the normalized performance for 2025 at about $2.39 billion, you've got a line growth and cost efficiencies of $388 million, that looks like you're seeing about 16% year-to-year growth on that area. Is there anything you'd call out as unusual cost efficiencies? What would you say is the sort of underlying core growth? If I might slip in one thing, Saum, you mentioned the states where you've had the unusual hits — Florida, Arizona, Michigan, South Carolina, and Texas. I don't think we're surprised by Florida and Texas, but I am a little surprised by the expansion states, Arizona and Michigan, that they are seeing big disenrollment. Any thoughts about that? I think the feeling has been that most of this would be targeted at non-expansion states. Any thoughts?
Why don't I start with the last question and then pass it back to Sun for the bridge question. It's interesting. Enrollment numbers publicly have been impacted in those states. These states, which are swing states, must have had a lot of members needing premium tax credits to continue coverage. We haven't dug in deeply enough to know if the issue is that the bronze metal product is not attractive enough in those states, or if eligibility for Medicaid for those at the lowest income levels who would require the highest premium support are not qualifying for Medicaid. You can see it in our numbers: exchange admissions are down, uninsured is up. It's not quite one-to-one, but it's certainly in that 80%-100% range. That is happening and it's bigger in the numbers in those states I called out.
A.J., I don't know that there's anything unique or abnormal I would point out on the bridge. It's an aggregation of the themes we mentioned: our acuity focus, growth investments to grow acuity and volumes, OpEx management that we planned last year into this year, and being nimble on a site-by-site basis. Commercial rates have been as expected this year. We've managed operating expense pressures around professional fees, which have grown about 10% since last year per our expectations. We've also called out the supplemental Medicaid revenues that were either out of period or not in our original guidance. Those are the main items to highlight.
Okay. All right, thanks a lot.
Our next question comes from Justin Lake with Wolfe Research. Your line is now live.
Thanks. I wanted to dig in on your strong year-over-year revenue growth in the quarter. From your disclosures, it looks like it's being driven by commercial and Medicaid. Maybe you could tell us what your commercial employer group revenue growth looked like in the quarter, give us some idea there. On Medicaid, your revenue was up about $125 million year-over-year. I know you had this $90 million of out-of-period, but last quarter, the second quarter of 2025, you had $70 million. Really that's only $20 million of the $125 million year-over-year increase. I'm curious what drove the other $100 million-plus in Medicaid revenue growth year-over-year, and how we should think about that going forward. Thanks.
Let me address some of the Medicaid piece, and Sun can go back on the commercial part. Two things on Medicaid. First, we are very much committed in our markets where we have large markets and multiple trauma centers with a heavy Medicaid population. It's not just Southeast Michigan, but also Memphis and Tennessee, central and desert parts of California, where there's significant need for high-acuity Medicaid-related services. We have been focused on growing those service lines and, of course, accept all patients. Our efforts to be a trauma receiving center for outlying hospitals that can't take care of the sickness level of patients extends to all payers. Those types of cases, combined with investments in our neonatal intensive care unit business, drive revenue growth. That's largely what it is. State-directed payment program monies help support those investments and are monies we consider earned as we put in place services and capital investments for the sickest Medicaid patients. In terms of forecasting Medicaid revenue growth going forward, I won't do that today because I haven't modeled it precisely in the way you're asking. Conceptually, the reasons are what I described combined with state-directed payment program portions from Q2 of last year to this year. Sun, you want to take the commercial part?
If you look at our disclosures, our managed care category mix was down about 2.7% in terms of proportion of revenues, driven by exchange. Outside of exchange, other commercial payer classes were up low single digits quarter-over-quarter in both volume and patient revenue. On the Medicaid delta, you are right the supplemental out-of-period numbers explain roughly $22 million-$25 million of the change year-over-year. There are two other mechanical components: additional programs that were outside our guidance for this fiscal year—an increase in a Florida program is an example—and growth through the care we provide, program adjustments, and timing items.
Thanks.
Our next question comes from Sarah James with Cantor Fitzgerald. Your line is live.
Thank you. I want to isolate the growth, not the efficiency aspect, but the growth on the hospital segment earnings guide bridge. Earlier, you listed off some contributors. They all sounded sustainable around rate negotiations and other aspects, the guide sounds like you're assuming the second half benefit is just over about half of what you recognized in first half, when I take the $100 million versus the $60 million as a proxy, even though I know that's total company and I'm focusing on hospital here. Is that delta just conservatism, or is there a good portion of the year-to-date hospital segment non-efficiency growth drivers that's transitory?
I think it's more that we're prudent about the fact that from Q1 to Q2, the exchange impact accelerated significantly. It's possible that even though the rate of growth in the negative impact won't be the same as it was from Q1 to Q2, it could get a little worse. We're not blind to the trends, and the most important thing is we were prepared for them and continue to be prepared. I think it's consistent with our overall guide.
If you look at our full year 2025 versus 2026 growth on a normalized basis, it's about 14%. We did have a difference in growth factors driven off of a 2025 baseline difference in Q1 versus Q2. For the second half, we're projecting about 11% growth versus last year while overcoming the expected exchange headwinds. We feel that's in line with our original, fairly aggressive guidance for the environment and we're comfortable with it.
Thank you.
Our next question comes from Scott Fidel with Goldman Sachs. Your line is now live.
Hi, thanks. I was hoping you could maybe talk about the HOPPS proposal and walk through some of the more significant reform elements to 340B that they proposed in terms of the increase in the facility reimbursement, while cutting the drug reimbursement. Ultimately, I was hoping how that sort of translates or transmits from hospital outpatient to ASC and ultimately how you think that proposal, what the key effects could be for the ASC business from a pricing, from a volume, and from a margin perspective. Thanks.
The outpatient proposed rule had a few curveballs and was a little different than in the past. We're still studying it. The 340B reallocation could be material. At the same time, they accelerated the recruitment, which raises questions about legal basis. There are a lot of moving pieces we're still looking at, and as we move ahead into the year, at the right time we'll synthesize those pieces into what we think the math looks like and share that when we discuss the following year.
Our next question comes from Kevin Fischbeck with Bank of America. Your line is now live.
Great. Thanks. I guess, when I look at that guidance assumption that the exchanges are going to be relatively similar in Q3 and Q4 relative to Q1, I guess historically, we've kind of seen exchange enrollment drop off year-over-year, and last year it didn't happen as much. I would've thought that that number would ramp a little bit more in the back half. Just curious on your thoughts about that and then kind of how to think about exchange as a potential headwind into next year. Should it be something similar to what you're seeing this year, less? Thoughts there. Thanks.
I don't want to guess about exchange enrollment next year without data from the next two quarters. Our estimates used available data, which lags, and what we're seeing in our business and from Conifer in enrollment work. Mostly it has been exchanges becoming uninsured, and that's how we've made our forecast looking forward. We planned for Q1 to Q2 to be the big data point, and we built moderation into Q3 and Q4 in our guidance. We'll re-evaluate as new data comes in.
Our next question comes from Ann Hynes with Mizuho. Please proceed with your question.
Great, thanks. I just want to focus on the surgery center. I don't think we've gotten a breakout of service line or procedures by modality in a while. Can you let us know how that's trending? Like how many of your procedures are orthopedic versus gastro? Maybe how is that trending versus the past three years and maybe the growth rate within each modality? That would be great. Thank you.
We generally have published that once a year in terms of overall proportion; we can do that again at the end of the year. The primary change is continuation of growth in higher acuity service lines so they become a bigger proportion of revenue. Case counts are skewed by high-volume, low-acuity cases, so revenue is a better focus. We're focusing on revenues and growth rates of higher acuity frontier service lines. As I indicated, we've started work a couple of years ago on opportunities to move newer procedures in GI and ophthalmology from hospital settings to the ASC setting and we'll see how that goes.
Our last question comes from Brian Tanquilut with Jefferies. Your line is now live.
Hey, good morning, and thanks for squeezing me in. Congrats on the quarter. Saum, maybe—
Thanks.
Yeah, just all the comments prior to your release here, all these KOL calls pointing to weakness in volumes. It obviously doesn't sound like you're facing that. Is this a share gain situation? Maybe more broadly speaking, you and I in the past have talked about your view that volumes are going to remain strong because of demographic trends and whatnot. Just curious where your mind is now in terms of volumes and what you're seeing in terms of share at the local level for your assets. Thanks.
I'll move from what I'm most sure about to less sure. We migrated our hospital portfolio to markets we believed had better growth opportunities and returns, stepped up capital expenditure in those markets the last couple of years on growth initiatives, and we're seeing results. If you go back a couple of years, it was an open question whether Tenet could step up capital investments in hospital markets and see returns; our work now is paying dividends. We're seeing a good background environment coupled with benefits from our investments and expense initiatives, which supported earnings ahead of our expectations. Looking at published numbers in the industry showing 2+% type of volume growth, when you look back over a few years those are healthy years. This is not an environment to be pessimistic about for acute care. Demographics, aging, chronic disease burden contribute. I'm more optimistic. We're not seeing consumer pullback right now. Where we have pluses and minuses in the ASC business this quarter, it's more geographic or exchange related after you adjust for the migration of low acuity cases out of the ASC setting, rather than a systematic deferral of care. We assume demand is there and that our investments in access and service levels will allow us to continue to deliver, which underpins our guidance increase for the balance of the year.
Thank you, Saum.
We have reached the end of the question and answer session. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.
Thank you, everyone.