Tenet (THC) Q2 2026 Earnings Call Transcript

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DATE

Friday, July 24, 2026 at 11:30 a.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer - Saumya Sutaria
• Executive Vice President and Chief Financial Officer - Sun Park
• Vice President of Investor Relations - William McDowell

TAKEAWAYS

• Net Operating Revenues -- $5.628 billion, an increase of 6.8% compared to the second quarter of 2025, driven by same-facility revenue growth and the impact of acquisitions.
• Adjusted EBITDA -- $1.304 billion, representing a 23.2% margin and 16.3% growth versus the prior year, reflecting revenue performance and disciplined operating expense management.
• Adjusted Diluted EPS -- $6.12, representing a 52.2% increase compared to $4.02 in the second quarter of 2025.
• Ambulatory Care Adjusted EBITDA -- $542 million, an 8.8% increase over the second quarter of 2025, contributing 25% of the segment full-year 2026 guidance.
• USPI Same-Facility System-Wide Net Patient Service Revenues -- 5% growth, reflecting a strategic focus on high-acuity cases and favorable service mix.
• USPI Net Revenue Per Case -- 6.3% increase, partially offset by a 1.2% decline in same-facility case volumes as the segment prioritizes higher acuity procedures.
• Total Joint Replacements -- 10% same-store volume growth in ambulatory surgery centers over the prior year.
• Hospital Segment Adjusted EBITDA -- $762 million, a 22.3% increase over the second quarter of 2025.
• Hospital Adjusted EBITDA Margin -- 18%, an increase from 15.6% in the second quarter of 2025, supported by volume growth and expense management initiatives.
• Same-Hospital Inpatient Adjusted Admissions -- 2.6% growth, representing sequential improvement from the first quarter of 2026.
• Hospital Revenue Per Adjusted Admission -- 3.3% increase, reflecting acuity growth and increased supplemental Medicaid revenues, partially offset by exchange volume declines.
• Exchange Revenues -- 17% decline compared to the second quarter of 2025, representing 5.5% of consolidated net operating revenues.
• Exchange Admissions -- 13.5% decline, with management observing a nearly one-to-one conversion from exchange volume to uninsured volume.
• Supplemental Medicaid Revenues -- $92 million favorable out-of-period impact from prior years, compared to $70 million recognized in the second quarter of 2025.
• Share Repurchases -- $1.042 billion deployed to repurchase 5.7 million shares in the second quarter of 2026, totaling 7 million shares year to date.
• Repurchase Authorization -- $2 billion increase authorized by the Board of Directors, with $2.13 billion remaining as of July 23, 2026.
• 2026 Adjusted EBITDA Guidance -- $4.83 billion to $5.03 billion, an increase of $295 million at the midpoint compared to previous expectations.
• 2026 Net Operating Revenue Guidance -- $21.9 billion to $22.5 billion, representing a $300 million increase at the midpoint.
• 2026 Adjusted Free Cash Flow Guidance -- $1.825 billion to $2.055 billion, an increase of $225 million at the midpoint over prior guidance.
• USPI M&A Spend -- Expected to exceed $300 million for the full year 2026 based on a robust pipeline of potential partnerships.
• Leverage Ratio -- 2.33x EBITDA or 2.9x EBITDA less noncontrolling interests as of June 30, 2026.
• Cash Position -- $2.1 billion of cash on hand with no borrowings outstanding under the line of credit facility.

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RISKS

• Sutaria stated, "Exchange revenues have declined a significant 17% compared to second quarter of 2025," noting the highest impact in states like Florida, Arizona, Michigan, South Carolina, and Texas.
• Park noted, "Exchange revenues declined 17% from second quarter '25 and represented about 5.5% of consolidated net operating revenues in second quarter of 2026."

SUMMARY

Management for Tenet Healthcare Corporation (NYSE:THC) reported results that exceeded internal projections, leading to an increase in full-year guidance for revenue, earnings, and cash flow. The company stated that operational outperformance is being driven by a strategic shift toward higher-acuity services in both the hospital and ambulatory care segments, alongside the execution of technology-enabled expense management plans. While facing headwinds from a 17% decline in exchange-related revenues, management indicated that disciplined cost controls and growth in commercial managed care are offsetting these impacts. The company prioritized capital allocation toward ambulatory acquisitions and aggressive share repurchases, supported by a significant increase in projected adjusted free cash flow for 2026.

• Sutaria attributed margin expansion to a three-category cost structure initiative, including traditional productivity, clinical operations improvement, and "technology-driven, both automation, AI type work, combined with what we are doing in our global business center."
• CEO Sutaria noted that USPI is expanding its surgical robotics program, stating the expansion "continues to expand significantly" and is focused on "core general surgical type robotics work" rather than just orthopedics.
• The company is increasing acuity in legacy service lines, such as GI and ophthalmology, by moving higher-acuity procedures like duodenal endoscopy and retinal specialization from hospital settings to ambulatory surgery centers.
• Management observed no systematic consumer pullback or deferral of care, with Sutaria stating, "In our business, we're not seeing some kind of consumer pullback occurring right now."
• Hospital outpatient surgical programs reported strength, which Sutaria attributed to multiyear investments in hospital-based outpatient programs intended to capture elective volume.
• The company expects recently approved supplemental Medicaid program increases to contribute $140 million in 2026, with approximately $20 million of that total anticipated in the second half of the year.
• CFO Park highlighted the company's valuation as a driver for buybacks, noting that even with recent share price movement, the shares remain "very well discounted based on the free cash flow yield."

INDUSTRY GLOSSARY

• ASC (Ambulatory Surgery Center): Modern health care facilities focused on providing same-day surgical care, including diagnostic and preventive procedures.
• USPI (United Surgical Partners International): Tenet's ambulatory care segment and the largest ambulatory surgery platform in the United States.
• Adjusted EBITDA: A non-GAAP financial measure that represents net income before interest, taxes, depreciation, and amortization, further adjusted for certain non-recurring or non-cash items.
• NCI (Noncontrolling Interests): The portion of equity ownership in a subsidiary not attributable to the parent company.
• HICs (Health Insurance Exchanges): Public marketplaces established under the Affordable Care Act where individuals can purchase health insurance plans.
• NRAA (Net Revenue per Adjusted Admission): A measure of the average revenue generated per patient admission after adjusting for outpatient service volume.

Full Conference Call Transcript

Operator: Welcome to Tenet Healthcare Second Quarter 2026 Earnings Conference Call. After the speaker's remarks, there will be a question-and-answer session for industry analysts. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell. Vice President of Investor Relations. Mr. McDowell, you may begin.

William McDowell: Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's second quarter 2026 results as well as a discussion of our financial outlook. Tenant senior management participating in today's call will be Dr. Sam 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 Sam.

Saumya Sutaria: Thank you, Will, and 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% and 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 health care 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. Again, 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.

Additionally, 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 continue to be -- 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 to $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 noted 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 strength 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.

Sun Park: Thank you, Sam, 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 of our segments, beginning with USPI. In the second quarter, USPI's adjusted EBITDA grew 8.8% over second quarter of '25 at $542 million, with adjusted EBITDA margin at 39%.

The 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 2016 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 '25 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 '25, we had $70 million of favorable impact related to prior years. We have not assumed any of this favorability in our initial guidance for 2026, and 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.

Next, 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 $1.4 billion to $2 billion of adjusted free cash flow year-to-date. As of June 30, 2026, we had $2.1 billion of cash on hand, with no borrowings outstanding under our line of credit facility. And additionally, we have no significant debt maturities until late 2027. And finally, during the second quarter, we repurchased 5.7 million shares of our stock or $1.04 billion. Year-to-date, we have repurchased almost 7 million shares of our stock for $1.36 billion.

As Sam noted, the Board of Directors has authorized a $2 billion increase in share repurchase 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 2.33x EBITDA or 2.9x 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 '26, we now expect consolidated net operating revenues in the range of $21.9 billion to $22.5 billion, an increase of $300 million at the midpoint of the range over prior expectations. As Sam mentioned, we are raising our '26 adjusted EBITDA outlook range by $295 million at the midpoint to $4.83 billion to $5.03 billion, reflecting the strong fundamental performance of our businesses. At USPI, we are now expecting '26 adjusted EBITDA of $2.16 billion to $2.22 billion. And in hospitals, we are raising our '26 adjusted EBITDA outlook range by $285 million at the midpoint to $2.67 billion to $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. This $140 million, about $20 million is expected in the second half of our fiscal year.

Finally, we expect third quarter '26 consolidated adjusted EBITDA and to be in the range of 23% to 24% of our full year consolidated adjusted EBITDA at the midpoint, and we expect third quarter '26 USPI EBITDA to be in the range of 24% to 25% of our full year USPI adjusted EBITDA at the midpoint. Turning to our cash flows for '26, we now expect adjusted free cash flow after NCI in the range of $1.825 billion to $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 '26 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. And as Sam 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 '26.

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. And 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 '26. 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. And with that, we're ready to begin the Q&A. Operator?

Craig Hettenbach: Sam, 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. So 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.

Saumya Sutaria: Sure. Thanks, Craig. I think there's 3 or 4 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, right, 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 what I would describe as more clinical operations, cost improvement.

And we really didn't feel that Category 1 would be adequate and adequate to sustain us through the next few years. And so we put increased effort in the length of stay management, service level management, for example, in the emergency department throughput in the hospital scheduling efficiencies and better utilization of our operating room and cath lab assets in the hospitals and the ASC business. As an additional initiative, more complex, frankly, requires more behavior change and process redesign, but very important to what we're doing.

The secondary benefit of that work, of course, is that supported the service levels for patients and physicians, especially in the important emergency department area so that it's easier for them to gain access. And then the third area is more what I would describe as the technology-driven, both automation, AI type work, 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. It's in some cases can literally automate or replace work.

And 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. So really, all 3 of those areas were things that we had planned or spent time planning last year. And I think the benefit we're seeing is we were just able to hit the ground running on execution in January. And so it is accrued into the business over these first 2 quarters.

Benjamin Rossi: Great I just wanted to turn to the ambulatory segment for a moment. So given the strength of cost revenue per case to start of the year, I appreciate some of the in pieces in your 3% to 6% top line growth expectation. I know the press release stated the can service mix, but 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? And then 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?

Saumya Sutaria: Yes. Well, 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. So orthopedics, but expanding the range of orthopedics, that 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, continues to expand significantly. And when I say robotics here, I'm not just referring at all to orthopedics, I'm talking about core general surgical type robotics work that we see as important. We see increased activity in bariatrics.

And again, as we've indicated over time, just kind of a steady -- slow, but steady march into the cardiovascular space, which will take some time. The other thing that we have done after really studying the spaces over the last couple of years, is started to increase the acuity in some of the more core legacy service lines. So in particular, GI and ophthalmology, we've started to push further into higher acuity procedures, right?

So duodenal endoscopy and associated procedures and biopsies, retinal work or retinal specialization in the ambulatory surgery center, things that begin to improve or increase the acuity and expand the array of services in some of those core service lines in addition to what I described as more of the surgical frontier service lines that have a lot of growth in front of them.

Matthew Gillmor: I wanted to ask about the exchange performance. I appreciate you didn't change the guide. I was just curious how things played out relative to your expectations in terms of the decline in the revenues and the volumes patient shifting over to commercial coverage are becoming unassured, any commentary there would be great.

Saumya Sutaria: Yes. Go ahead, Sun, do you want to...

Sun Park: Yes. Matthew, it's Sun. So first of all, just on 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%. And exchange volume admissions down about 13.5%. So I would say both of these metrics were roughly in line with our expectations, both 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, and then we expect the overall market trends that we saw in Q2 to roughly continue into Q3 and Q4 rest of the year, 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 both from an OpEx standpoint as well as other growth initiatives and deliver results. And then the only other thing I would add is I think we are roughly seeing a pretty consistent conversion from exchange patient volume into uninsured on a pretty much one-to-one basis. So we did see a proportionately equal increase in uninsured volumes in our Q2 as well. And we expect that to continue as well in the second half.

Stephen Baxter: I wanted to ask about the revenue per adjusted admission trend in the second quarter improved a lot from where it was in the first quarter, the software number that you posted then. Can you help us unpack the factors that are driving the improvement? And then in the release, you cited strength in the commercial book as a call out. Is there something happening there kind of above and beyond the normal type rate increases you've come to expect in that part of the business?

Saumya Sutaria: Go ahead, Sun. I don't think there's anything abnormal there.

Sun Park: Stephen. Yes, on the NRAA, we did see softness in Q1, which -- at that point, we said we thought it was a temporary Q1 artifact and that we thought our long-term acuity strategy would play out. And I think in Q2, it did. I think the only moving pieces we would highlight NRAA stat is 2 things. One is we did have out-of-period supplemental payments, like I said, of $92 million, but we had $70 million in the prior Q2 of $25 million. So relatively small net impact. And then probably the largest headwind in our NRAA was obviously the exchange revenue movement, and that represented almost 2% of NRAA headwind in the quarter.

So we were very pleased with our overall acuity. It goes right in line with the commercial volume increases. And as Sam mentioned, I don't know that there's anything special to call out there. Thanks for your question.

Pito Chickering: Looking at the ASC volume weakness this quarter, how much is tied to HICs and surelective versus your focus on higher acuity procedures. Did you see any geographical differences in elective across your portfolio depending upon the HICS exchanges? Has the overall demand sort of still there across your portfolio as you think about your broad based? And then last part of this multipart question here. looking at inpatient surgeries, how much of that did you capture in your ASCs versus weakness in inpatient?.

Saumya Sutaria: Yes. Well, I don't -- I mean, from our perspective, the ASC volumes were strong because we're focused on the growth that we see in our high acuity service line priorities, just like I highlighted in joint replacements mean 10% year-over-year growth, given how large our portfolio has become is outstanding growth from my perspective. So the vast majority of the impact there continues to be migration of lower acuity quick pain procedures and other things into the office space setting or just deliberate migration of those sorts of cases. We're very pleased that we continue to be able to deliver strong revenue growth, 5% quarter-over-quarter in this environment, consistent with our strategy.

I couldn't tell if the question on geography was for the ambulatory surgery business or just surgeries overall I will answer the latter. I would say that surgical business overall, at least where we saw pressure on the elective side, primarily in the hospitals, tracked with some of the states that I described in my prepared remarks about where we're seeing the highest impact from the exchange enrollment declines. And I -- look, we had strong emergency department volumes, strong emergency department inpatient surgeries. Our elective surgery book was under more pressure on the inpatient side, but elective outpatient surgeries in the hospital or hospital patient-based department were actually quite strong.

And that, I attribute largely to the fact that over the past couple of years in these hospitals, especially as we've been doing more work at USPI, we have been investing in hospital-based outpatient surgical programs, and I think that's probably the driver of why the elective outpatient surgeries continue to look strong in this current environment. Like it was offset to what impact you might have seen from the exchanges, right, the investments we made there. That's the way I would think about it.

Benjamin Mayo: 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?

Saumya Sutaria: Yes. Thanks, Whit. I mean just at a high level, I'll reinforce the commentary that Sun made. I mean we do think at compelling valuations multiple valuations that given our growth prospects into the future, given the continued expansion of our USPI portfolio that share buyback are an attractive use of our free cash flow generation, which, as we indicated, is also improving for this year. Our hospital business, we continue to see good returns, as you can see, from both our margin improvements and our volumes in our strategic growth initiatives. We will continue down that path.

I think the only thing we've said there is that we're a bit more cautious on large-scale hospital builds until we understand market environment and expansion opportunities there. We've kind of been focused on 1 to 2 per year, as you know, recently, and we're a little bit more cautious on that to just make sure that the market conditions are right. But otherwise, our investments in the segment continue to be strong. And then obviously, the deployment and increase in our guidance for deployment of capital into the USPI segment this year. Sun, do you want to -- I don't know if there's anything you want to add to that here?

Sun Park: I would maybe add 2 things. One is, as we look forward into our debt position. I mean, I think it's very well managed. We have maturities spread over the next several years. I think are well within our ability to either refinance and/or pay down. So we're very comfortable there. And then when you mentioned our free cash flow generation, even if when we look at ourselves and a free cash flow yield metric, we feel our shares are still very well discounted based on the free cash flow yield. So I would just point that out.

Albert Rice: Maybe 2 things real quick. I appreciate the bridge in the slide deck, it's helpful. There's a lot of focus on core growth if I'm looking at the slide that has the normalized performance for '25 at about $2.39 billion, and you've got a line growth and cost efficiencies of $388 million, that looks like you're seeing about 16% year-to-year growth in that -- on that area. Is there anything you'd call out is unusual cost efficiencies. What would you say is the sort of underlying core growth? And if I might slip in 1 thing, Sam, you mentioned the states where you've had the unusual HICs hit, Florida, Arizona, Michigan, South Carolina and Texas.

I don't think we're surprised by Florida and Texas, but I'm 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, but there's a big drop off there, too. Any thoughts on that?

Saumya Sutaria: Well, why don't I start there and then I'll -- for the last question, and I'll pass it back to Sun for the first question. Yes, it's interesting the -- and you can see the enrollment numbers publicly. It have been impacted in those states. I mean, unfortunately, these states, which are swing states really must have had a lot of members with needing the support of premium tax credits in order to continue to acquire product in -- we haven't dug into it deeply enough to understand if the issue is that there just isn't enough coverage from a bronze metal product standpoint that's attractive enough versus other states.

Or if the issue has been that eligibility for Medicaid for those at the lowest levels of income who would have required the highest premium support is just -- they're just not qualifying for that Medicaid. So I mean, you can see it in our numbers, our exchange -- the exchange admissions are down, uninsured is up. It's not quite one to one, but it's certainly in that 80% to 100% of that range. And so you can see that is happening. And it's bigger in numbers in those states that I called out. Sun. Yes. The first part of the question on the rates?

Sun Park: Yes. I mean, A.J., I don't know that there's anythIng unique or abnormal that I would point out, right? I mean it's an aggregation of a lot of the themes that we mentioned, our acuity focus, the growth investments that we've made to help grow the acuity and the volumes in our hospitals. Obviously, OpEx management, both from a kind of a planned looking ahead standpoint that we did last year into this year as well as being nimble on a side-by-side facility-wise facility base, just depending on how things are going. Commercial rates, as we've talked about, have been as expected this year. we've managed through some of the operating expense pressures around professional fees.

It has grown about 10% since last year, which was per our expectations, and we've managed it. And then we've also called out separately the supplemental Medicaid revenues that were either out of period or not in our original guidance from a change standpoint. So yes, I think those are the only things that I would call out.

Justin Lake: I wanted to dig in on your strong year-over-year revenue growth in the quarter. So from your disclosures, it looks like it's being driven by commercial Medicaid. So maybe you could tell us what your commercial employer group revenue growth, what I looked like in the quarter? Give us some idea there. . And then 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 '25, you had $70 million. So really, that's only $20 million of the $125 million year-over-year increase.

So 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?

Saumya Sutaria: Well, let me address some of the Medicaid piece, and then Sun, if you want to go back on the commercial part of the question, the first half of the question will go in reverse order again. I mean I think 2 things here around Medicaid. First of all, we are very much committed in our markets. And as you know, we have some very large markets in trauma -- multiple trauma centers in environments with a heavy Medicaid population.

It's not just Southeast Michigan, where we've been very committed to that mission for a long time, but it's certainly in other states, Memphis and Tennessee, the central part of California, the desert part of California where there is significant need for high acuity Medicaid-related services. I mean this is why -- and we have been focused on growing those service lines. And of course, we receive all patients from that standpoint. In addition, Justin, our continued efforts to be a trauma receiving center for outlying hospitals that simply can't take care of the sickness level of the patients they're seeing extends to all payers as well. We accept all payers in the community when we're providing those services.

And of course, those types of cases, combined with our investments in our neonatal intensive care unit business drive revenue growth. And so that's largely what it is. And look, I've said this all along, this whole notion that somehow state-directed payment program monies, assuming you accept the construct, are not monies that are earned doesn't make a lot of sense to me because you really do have to put in place the services, make capital investments, work with physicians or attract them to build some of these sophisticated service lines for the sickest of Medicaid patients who also deserve access to good quality health care.

And we do that, and we consider that some of those payments that help support those investments are things that we earn and should be part of our core as opposed to not. But nevertheless, we sort of describe what's happening in the core separate from SPPs given the way we talk about things today. But make no mistake, we will continue to invest and grow and build those services for all payers in the hospitals. In terms of forecasting out what that implication is for Medicaid revenue growth going forward, I'll be honest, I'm not going to do that today only because I haven't looked at that in the way that you asked the question.

So I'm not sure I could provide a very well-informed answer. But conceptually, the reasons for it are what I described in addition to the state directed payment program portion that you called out from Q2 of last year to this year. Sun, do you want to take the commercial portion of the question?

Sun Park: Yes. Well, I think when you look at our disclosures, you'll see our managed care category down about 2.7% in terms of mix proportion of revenues that it represents. Now obviously, that downward trend is driven by exchange, as we talked about. If we look at outside of exchange, other commercial payer classes, I can tell you from a -- both from a volume and a patient revenue standpoint, it's up low single digits quarter-over-quarter. So I think we're pleased with that. And then, Justin, just the only other bridge I would give you in terms of the Medicaid delta.

You're right, quarter-over-quarter, '25 into '26, our supplemental payments are up the out-of-period numbers explain roughly $20 million to $25 million of that. There are 2 other components that are sort of mechanical in nature. One is additional programs that were outside of our guidance for this fiscal year and the increase in Florida program would be a good example of that versus our original guidance. And then as Sam said, the rest of it is through the care we provide the volume growth, some program adjustments and some timing items. So hopefully, that helps.

Sarah James: 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. But then 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, I know that's total company, and I'm focusing on hospital here. But -- is that delta just conservatism? Or is there a good portion of the year-to-date hospital segment nonefficiency growth drivers that's transitory? .

Saumya Sutaria: Well, I think it's more that we're prudent about the fact that from Q1 to Q2, obviously, the exchange or HICs impact accelerated significantly, and it's very possible that even though the rate of growth and the negative impact won't be the same as it was from Q1 to Q2. It could get a little bit worse, right? I mean we're not blind to the trends. And as I indicated, the most important thing is we were prepared for them and continue to be prepared for them. So I think it's very consistent with our overall guide. Sun, I don't know if you want to add to that? .

Sun Park: I would just say, Sam, listen, if you look at our full year 25% versus 26% growth on a normalized basis, right, it's very heavy, right? It's about 14% if you look at our IR deck. Now we did have a difference in growth factors just driven off of a 25 baseline difference in Q1 versus Q2 of our first half. As we get into the second half, I think we're projecting, if my math is roughly correct, about 11% growth in the second half versus last year. while overcoming the expected exchange headwinds. So we feel that's still very much in line with our original fairly aggressive guidance into this environment. So we feel good about it. .

Scott Fidel: Now, I guess. I was hoping you could maybe talk about the HOPS proposal and walk through some of the more significant, I guess, sort of reform elements to 340B that they proposed in terms of the increase in the facility reimbursement while cutting the drug reimbursement and ultimately hoping how that sort of translates or transmits from like hospital outpatient to ASC? And ultimately, how you think that proposal, what the key effects should be for the ASC business from a pricing, from a volume and from a sort of a margin perspective?

Saumya Sutaria: Yes. I mean the -- obviously, the outpatient rule -- proposed rule at this point was a little -- it had a few curve balls in it and was a little bit different than in the past. So we're obviously still studying that. I mean the 340B reallocation could be material. At the same time, they accelerated the recruitment, which fundamentally we're not even sure of the legal basis of.

So there's a lot of moving pieces here that we're still looking at -- and I think as we move ahead into the year, at the right time, we'll have synthesized those various moving pieces into what we think the math looks like and share that when we talk about the following year. .

Kevin Fischbeck: Great. I guess when I look at that guidance assumption that the exchange are going to be relatively similar in Q3 and Q4 relative to Q1. I guess historically, you've kind of seen exchange enrollment drop off year-over-year and last year didn't happen as much. So I would have thought that, that number would ramp a little bit more in the back half. So 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?

Saumya Sutaria: Yes. I mean I really don't want to guess about exchange enrollment in the following year without the data point seeing what happens in the next 2 quarters. As I indicated a few moments ago, we have thought about the fact that in our view, our estimates were about right. We knew that from Q1 to Q2 would be the big data point about how much it increased. It did, in fact, increased substantially. And we planned for that to really moderate into Q3 and Q4 based upon what we would imagine the trend line would look like, and we've built that into our guidance. I mean it's -- this is not a game of perfect forecasting.

It's a game of using the available data, which often lags a little bit and what we're seeing in our business and what we're seeing with Conifer doing enrollment work in terms of how much of that enrollment work is related to patients who were prior on exchanges versus Medicaid or something like that. been mostly exchanges becoming uninsured. And that's how we've made our forecast looking forward.

Ann Hynes: 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 3 years? Is it maybe the growth rate within each modality, that would be great.

Saumya Sutaria: Yes. I don't -- I mean, I think that we generally have published that once a year in terms of the overall proportion. And I guess we can do that again at the end of the year. But I would tell you that the primary migration, if you will, or change is just a continuation of growth in the higher acuity service lines so that they continue to become a bigger and bigger proportion of the revenue in the business. The case counts -- again, as we've talked, the case counts are sometimes so skewed by high volume, low acuity cases.

And unfortunately, other than what we're doing, there isn't really a good measure to compare a single orthopedic surgery versus 7 procedures that are done in 15 minutes each in the same time frame in the way the case counts work. So we obviously focus on the revenues focus on the growth rates of the important higher acuity frontier kind of service lines that were adapted working on.

And then as I indicated today, we have started work a couple of years ago on looking for opportunities that are now starting to get built into the business of newer type of procedures in both GI and ophthalmology to see about moving them from the hospital setting to the ASC setting, and we'll see how that goes.

Brian Tanquilut: Congrats on the quarter. Sam, maybe as I think about Yes. Just all the comments prior to your lease here with all these KOL calls pointing to weakness in volumes, it obviously doesn't sound like you're facing that. So -- is this a share gain situation? Maybe more broadly speaking, you and I have in the past talked about your view that volumes are going to remain strong because of demographic trends and whatnot. So 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?

Saumya Sutaria: Yes. I mean let me start all I'll sort of move from what I'm most sure about to less sure about. And what I mean by that is when we look at our business, we have obviously migrated our hospital portfolio to markets that we thought we had better growth opportunities in and better return on invested capital opportunities in. We've stepped up our capital expenditure in those markets the last couple of years on growth initiatives, and we're seeing results from that.

If you go back a couple of years, I think people would have asked the question, can tenants step up capital investments in hospital markets and see returns either from a growth or margin perspective, that was an open question. And our job was to test that post all the divestitures and demonstrate that what we did with the portfolio restructuring would, in fact, add value for our shareholders over time. And we're seeing evidence of that. We pleased about, because it means that our work is paying dividends in those areas.

And so I think what we're seeing, at least in our volume environment is a good background environment. coupled with the benefits of the returns on the investments that we've made. And then when you add on top of that the fact that we had planned so actively out of concern for what would happen with the exchanges in 2027 that we were able to hit the ground running in January on our expense initiatives, the combination of those things have supported earnings and happened to have supported earnings ahead of our expectations that we created.

Now if I just step back, because I went through this exercise just reflecting on the past couple of weeks, where kind of our volumes look like and some of the reports that are out there about overall volumes. I mean, this is not an environment to be pessimistic about with respect to the acute care industry, I mean the fact is that these 2 plus -- 2.5-plus percent type of volume numbers that we're seeing published from others in the industry and including us, when you look back over a few years or you go back pre-COVID, I mean, those are healthy years.

And you see as many quarters or years where it's above that as it is below that. So this is not an environment that 1 would describe as negative. I do think some of that is general demographic trends, aging, chronic disease burden, and things of that nature. But it's also a reasonable environment. So I generally am more optimistic. We're not seeing -- in our business, we're not seeing some kind of consumer pullback occurring right now.

Where we have pluses and minuses in the ASC business for the quarter, I would say it's more geographically based or exchange related after you get past the stuff that we're doing to get rid of low acuity in that setting, more than it is some systematic view that consumers are now deferring care. I don't see that yet in the results that we have there. And I think we should continue to be optimistic that if we work on access, if we make it easy for doctors and patients to get in, if the service levels improve, I think the demand is there.

And that's the assumption we're making with our guidance increase into the balance of the year that we will be able to manage that and deliver that based upon what we have achieved in the first half of the year.

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

Saumya Sutaria: Thank you, everyone.

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