Even as COVID-19 surges, Tenet, UHS execs optimistic about Q4

Finance

COVID-19 cases are surging in virtually every region of the U.S. and hospitalizations are at a record high, but some of the nation’s biggest hospital operators say they aren’t concerned.

Two of the biggest for-profit systems say they are optimistic about volume and cost controls, and operating with an eye toward recovery. Top executives from hospital chains Tenet and UHS said that’s because there aren’t as many unknowns as in the previous coronavirus surge earlier this year, speaking this week at Wolfe Research’s virtual healthcare conference.

“Yes, we are seeing increases across the country. Clearly that is what you read, but it’s not anywhere near where we’re not able to handle it,” Tenet CEO Ron Rittenmeyer said Wednesday.

Tenet has more facilities in Texas than any other state, and reports on the ground there paint a far more harrowing picture, though. Hospitals across the country say they are overrun, and some have had to halt or pare back on elective procedures to ensure they have enough staff and equipment to care for COVID-19 patients.

​For UHS’ acute care hospitals, the second wave around the July timeframe was much worse than what they’re experiencing today, CFO Steve Filton said Thursday — though UHS does have two hospitals, both in Texas, with record levels of COVID-19 patients.

Tenet’s El Paso market is particularly stressed, as the city has had to call in multiple mobile morgues.

But unlike earlier in the year, in markets seeing more intense coronavirus outbreaks, people are becoming more comfortable going back to the doctor, Rittenmeyer and Filton argued. The executives chalked that up to ongoing pandemic fatigue and that some medical needs, perhaps delayed earlier in the year, can no longer be put off.

On Wednesday, the U.S. recorded more than 170,000 new cases, hospitalizations set a new record for the ninth day in a row and deaths crossed the 250,000 mark, according to data from Johns Hopkins University’s coronavirus tracker.

As a result, some states and local governments have issued a new round of restrictions on business and daily life, including school closures and warnings to keep Thanksgiving celebrations next week small.

In Washington, New Mexico, Oregon and Michigan, non-essential businesses are mostly closed or operating at limited capacity, per The New York Times tracker of state responses. However, many governors’ executive orders have exempted providers from the restrictions as an essential need, allowing them to continue elective procedures and treatments — if the patients are there.

Along with focusing on tight cost management, hospitals are banking that higher acuity patients will make up for any loss of lucrative elective procedures as the curtain closes on 2020 and opens on 2021.

​”In all our markets, the bias toward higher-acuity procedures is still there,” which is to be expected, Tenet COO Saum Sutaria said Wednesday, noting he expects the demand for lower acuity needs to recover next year.

COVID-19 patients are higher acuity and tend to result in higher revenue, because they consume more resources. However, a higher volume of COVID-19 patients won’t make up any deficit lost from dampening volume of lucrative electives, as they also necessitate higher spending, meaning they’re not as profitable for providers as some people might think — and are less profitable than procedural or surgical patients, Filton said.

And as the volume of COVID-19 patients increases, non-COVID-19 volumes decrease. That inverse relationship could result in more stress on operators as the pandemic worsens in the winter.

​”The relationship is going to persist until we get to the other side of this … but that dynamic is much less pronounced than it was, and that gap is less pronounced than it was at the beginning of the surge,” Filton said.

One positive is that hospitals, informed by the previous surge around July, have more institutional and clinical knowledge on how to manage COVID-19 cases, the executives said.

“On balance, we’re not feeling the type of pressure we were feeling in the early days, where you don’t entirely know what you’re fighting,” Rittenmeyer said.

Hospital operator’s outpatient businesses have helped make up for lower inpatient volume too, and could be an arena primed for M&A this year and next as independent medical practices and smaller hospitals face heightening financial pressure.

Tenet’s outpatient business, United Surgical Partners International, includes about 260 ambulatory surgery centers, 40 urgent care centers and more facilities across 28 states. Having that large diversified business has helped, both with volume and revenue, Rittenmeyer said, noting it’s a ripe environment from a business development standpoint.

USPI added 1,000 new doctors during the coronavirus, and has ramped up M&A, according to the CEO. And, Tenet isn’t taking divestitures off the table.

“We’re always looking at the key markets that we have, and the opportunities that may be to put those things in the market to someone who’s a more natural owner,” Rittenmeyer said.

Tenet is currently trying to sell two hospitals in the Memphis, Tennessee, area to Methodist Le Bonheur Healthcare for $350 million. However, the Federal Trade Commission is suing to block the deal, alleging anticompetitive concerns.

As for UHS, “we could see a busier pipeline” in 2021, Filton said.

But UHS isn’t looking to pursue deals or resume share repurchasing until it has paid back Medicare loans from the government, leery of being seen as using taxpayer funds to return value to shareholders.

Some major health systems have announced intentions to pay the government back significant amounts of federal aid, including grants set aside by congressional relief legislation like the Coronavirus Aid, Relief, and Economic Security Act, that don’t need to be repaid. HCA Healthcare, for one, has pledged to return all of its $1.6 billion in grants, as the hospital segment has proved more resilient than some expected during the pandemic.

UHS, however, does intend to keep the lion’s share of the funds, despite reversing about $5 million recorded as revenue in the third quarter. As of Sept. 30, the Pennsylvania-based system had received $396 million in grants and recorded $213 million as revenue so far, leaving it with about $183 million remaining in incremental funds that will likely be recognized in the fourth quarter, Filton said.

UHS has also received $695 million in accelerated Medicare payments, which need to be repaid beginning in the second quarter of next year.

The executives said they plan to continue their focus on cost management going into 2021, expecting third quarter trends to hold strong in the fourth quarter and into early next year despite ongoing uncertainty.

Hospital operators are making the assumption that acute care hospitals will continue to operate as long as the pandemic is around with slightly depressed volumes offset by higher acuity cases and cost cuts, Filton said, noting he expects to post full-year EBITDA “not entirely off base” from what UHS originally expected for this year.

And Tenet is still in the middle of planning for 2021, Sutaria said, noting the operator’s goal is to drive its business units back to where they were before the onset of the pandemic.

However, the duration and severity of the current COVID-19 surge are still unclear. In particularly stressed-out markets, hospitals quickly ramped up capacity, something operators said they learned in July and August and allows them to continue as many profitable electives as possible for as long as possible.

Despite stress for both UHS and Tenet in Texas, the two company’s portfolios have been relatively unscathed. That could change as cases, hospitalizations and deaths continue to shatter previous levels.

“At least at the moment, our hospital portfolio, particularly our acute hospital portfolio, are not seeing a lot of that,” Filton said, noting the system continues to prepare for the worst. “That dynamic could certainly change.”

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