Executive Summary / Key Takeaways

• Tenet Healthcare has fundamentally transformed its portfolio through strategic hospital divestitures and aggressive expansion in its high-margin Ambulatory Care segment (USPI), significantly improving its financial profile and strategic flexibility.
• Operational discipline and strong market demand drove robust Q1 2025 performance, with consolidated adjusted EBITDA growing 14% year-over-year and margins expanding by 320 basis points, exceeding internal expectations.
• The Ambulatory Care segment continues to be a primary growth engine, fueled by acquisitions, de novo development, and a disciplined shift towards higher-acuity procedures like total joint replacements, driving strong revenue per case growth (9.1% in Q1 2025).
• Improved cost management, particularly in labor (260 basis point SWB improvement in Q1 2025), coupled with strong utilization and favorable payer mix, is enhancing profitability in the remaining Hospital Operations segment.
• With a significantly deleveraged balance sheet (3.14x EBITDA less NCI) and strong free cash flow generation ($1.8B-$2.05B guided for 2025), Tenet is well-positioned to execute its capital allocation priorities, including continued USPI expansion and active share repurchases.

Tenet Healthcare Corporation stands as a diversified healthcare services provider, strategically positioned across its Hospital Operations and Services and its rapidly expanding Ambulatory Care segments. With a history dating back to 1967, the company has undergone a significant transformation in recent years, reshaping its footprint and financial structure to better align with evolving market dynamics and capitalize on high-growth opportunities. This strategic pivot has involved divesting certain hospitals while aggressively building out its Ambulatory Care segment, primarily through its USPI subsidiary.

The broader healthcare industry landscape is characterized by several powerful trends: an aging population driving increased demand for medical services, a continued recovery in utilization following the pandemic, a secular shift of surgical procedures to lower-cost outpatient settings, and ongoing regulatory and policy uncertainty. Within this environment, Tenet competes with a range of players, from large national hospital systems like HCA Healthcare (HCA) and Universal Health Services (UHS) to specialized providers like Encompass Health (EHC) and The Ensign Group (ENSG), as well as indirect competitors in telehealth and retail health. While larger rivals like HCA benefit from immense scale and purchasing power, Tenet has sought to carve out a competitive advantage through portfolio optimization, operational efficiency, and a focused approach to high-acuity services and the ambulatory space.

Central to Tenet's strategy is its emphasis on operational effectiveness and leveraging technology to enhance care delivery and efficiency. The company has been investing in selected AI-enabled technologies, applying them across areas such as clinical care coordination, medical documentation, revenue cycle management, and administrative services. Management believes these tools have the potential to enhance business processes and support the efficient delivery of high-quality care. While specific quantitative targets for AI implementation are not detailed, the strategic intent is clear: to improve efficiency and potentially reduce costs in both clinical and administrative functions. Furthermore, the company has highlighted the role of telemedicine in its offerings, aiming for faster response times in certain markets, which contributes to its integrated care model and differentiates it from some more narrowly focused competitors. This technological focus, particularly the application of AI and telemedicine, supports Tenet's goal of improving the customer care experience and driving profitability through enhanced efficiency and optimized service delivery.

The strategic transformation of Tenet's portfolio has been a defining feature of its recent history. In 2024 alone, the company completed the sale of 14 hospitals and related operations, generating approximately $5 billion in gross proceeds. These divestitures were executed at multiples reflecting operational improvements made over prior years and were aimed at enhancing the return profile of the remaining hospital portfolio, focusing on more attractive geographies, and enabling significant balance sheet deleveraging. Complementing this, Tenet aggressively expanded its Ambulatory Care segment, adding nearly 70 centers in 2024 through acquisitions and de novo development, including a tranche of 45 centers acquired in Q1 2024. This expansion continues, with plans to invest approximately $250 million annually in USPI M&A and add 10 to 12 de novo centers in 2025. The strategic rationale is clear: capitalize on the secular shift to outpatient care, which offers higher margins and greater capital efficiency compared to traditional inpatient services.

This transformed portfolio is demonstrating strong operational performance. In the first quarter of 2025, Tenet reported consolidated net operating revenues of $5.22 billion and consolidated adjusted EBITDA of $1.163 billion. This represents a 14% increase in adjusted EBITDA over Q1 2024, with the adjusted EBITDA margin improving by 320 basis points to 22.3%. Management noted that these results were above expectations, driven by fundamental strength in same-store revenue growth, high acuity, and effective cost management.

The Ambulatory Care segment, operating primarily through USPI, continues to be a significant growth engine. In Q1 2025, the segment reported net operating revenues of $1.194 billion, a 20% increase over Q1 2024, and adjusted EBITDA of $456 million, up 16%. Same-facility system-wide revenues grew 6.8%, driven by a notable 9.1% increase in net revenue per case, reflecting a disciplined shift towards higher-acuity procedures. While same-facility case volumes were down slightly (-2.1%), the focus on acuity is yielding higher revenue per case. This is particularly evident in the growth of total joint replacements in ASCs, which were up 12% in Q1 2025 and 19% in full-year 2024. USPI's competitive position is strengthened by operating with freestanding ASC rates, which provides insulation from potential site neutrality rule changes, and its minimal exposure to Medicaid compared to the hospital segment. Management views the expansion of orthopedic services as a key growth vector for the next 5-10 years, capitalizing on migration opportunities from the hospital outpatient setting.

The remaining Hospital Operations segment, while seeing a decrease in total net operating revenues (-7.9% in Q1 2025) due to divestitures, demonstrated strong performance on a same-hospital basis, with revenues increasing by 6.5% and admissions growing by 4.4%. This growth was attributed to a favorable payer mix, higher patient volume and acuity, and negotiated commercial rate increases. The segment also showed significant improvement in cost management. Consolidated salaries, wages, and benefits as a percentage of net revenues improved by 260 basis points to 40.6% in Q1 2025, reflecting lower contract labor and premium pay costs, alongside a stable wage environment and operational discipline. Same-hospital SWB as a percentage of revenue decreased by 230 basis points to 45.3%. While supplies expense per adjusted admission increased slightly (2.8%), overall cost-efficiency measures and lower contract labor contributed to margin expansion. The segment continues to invest in key growth opportunities, including expanding capacity in growing markets (like the new Westover Hills hospital) and focusing on high-acuity service lines. Conifer Health Solutions, the revenue cycle management joint venture within this segment, has retained and expanded relationships with the acquirers of the divested hospitals, which is expected to contribute to future growth.

Tenet's financial health has significantly improved as a result of its strategic actions. The company ended Q1 2025 with $3.00 billion in cash and cash equivalents and no borrowings outstanding under its $1.50 billion revolving credit facility.

Net cash provided by operating activities was $815 million in Q1 2025, up from $586 million in Q1 2024, driven by improved net income and working capital timing. The company has also made substantial progress in deleveraging, achieving a leverage ratio of 3.14 times EBITDA less NCI as of March 31, 2025, which management views as competitive with leading peers and providing significant strategic flexibility. With no significant debt maturities until 2027 and primarily fixed-rate long-term debt ($12.66 billion outstanding at Q1 2025), the company's capital structure is well-managed.

This strong financial position supports Tenet's capital allocation priorities. The top priority remains expanding the USPI segment through M&A and de novo development. The company also plans to invest in key hospital growth opportunities, evaluate debt retirement and refinancing, and return capital to shareholders via share repurchases. Tenet repurchased $348 million of its common stock in Q1 2025 and has a $1.50 billion share repurchase program authorized, with management indicating plans to be active repurchasers, particularly at current valuations which they view as disjointed from the company's growth prospects and capabilities.

Looking ahead, Tenet has reaffirmed its full-year 2025 guidance, initially provided in February. The outlook projects consolidated adjusted EBITDA in the range of $3.975 billion to $4.175 billion, representing approximately 7% growth on a normalized basis after accounting for the impact of 2024 divestitures and out-of-period Medicaid payments. This guidance is based on assumptions including continued growth in same-store volumes (2%-3% hospital admissions/adjusted admissions, 3%-6% USPI same-facility revenue), effective pricing, and sustained operational efficiencies. Segment-specific normalized EBITDA growth is projected at 8.5% for USPI and 5.7% for Hospital Operations. The outlook also includes $35 million in expected net revenues from Tennessee supplemental Medicaid programs. For Q2 2025, consolidated adjusted EBITDA is expected to be 24%-25% of the full-year midpoint, with USPI EBITDA projected at 24.25%-25.25% of its full-year midpoint. Free cash flow for 2025 is guided in the range of $1.8 billion to $2.05 billion, resulting in free cash flow after NCI distributions ($750M-$800M) of $1.05 billion to $1.25 billion. Capital expenditures for 2025 are anticipated to be between $700 million and $800 million.

Despite the positive outlook, Tenet operates in an environment with inherent risks. These include potential changes in federal and state healthcare policy, particularly concerning government funding and reimbursement, which could be material. General economic conditions, including inflation and potential tariffs, supply chain disruptions, and labor costs, remain factors impacting operations. The highly regulated and litigious nature of the industry exposes the company to investigations and lawsuits, with potential for significant costs. Cybersecurity incidents and natural disasters also pose risks. However, management emphasizes that their strategic focus on operating discipline, cost control, diversification (especially USPI's lower exposure to certain risks), constructive engagement in policy discussions, and contingency planning are key to navigating these potential challenges. They explicitly stated they are not altering their business strategy due to policy uncertainty, focusing instead on executing growth initiatives and leveraging their operational platform.

Conclusion

Tenet Healthcare has successfully executed a significant portfolio transformation, shedding lower-margin assets and focusing on its higher-growth, more capital-efficient Ambulatory Care segment while optimizing its remaining hospital operations. This strategic pivot, coupled with disciplined cost management and a favorable demand environment, has driven strong recent financial performance, highlighted by robust EBITDA growth and margin expansion in Q1 2025. The company's investment in technology, particularly AI and telemedicine, supports its efficiency and quality goals, contributing to its competitive positioning. With a substantially deleveraged balance sheet and strong free cash flow generation, Tenet possesses considerable financial flexibility to pursue its strategic priorities, including continued expansion of its USPI segment and returning value to shareholders through share repurchases. While regulatory and operational risks persist in the dynamic healthcare landscape, Tenet's focused strategy, operational discipline, and diversified business mix position it to continue executing on its growth initiatives and create value for investors, underpinned by the fundamental tailwinds in ambulatory care and high-acuity services.