HCA Healthcare, Inc. (HCA) Earnings Call Transcript & Summary

Hello, everyone, including our webcast audience. I'm John Ransom. We're officially through the halfway point of the Raymond James 41st Annual Conference. We once again appreciate the support that HCA has shown in our conference. We've got Bill and Mark. The format today will be an abbreviated presentation, followed by Q&A. We'll try to kill the elephant in the room around N95 masks in supply chain, but also getting some other things. And with that, I'm excited to turn the floor to Bill Rutherford, CFO.

Thank you, John. Good afternoon, everyone. It's good to be with you. I've got a few slides we'll go over and be happy to open up to Q&A. Before we start, I'll just reference to the forward-looking statements. I hope most of you are familiar with HCA. We're one of the largest health care providers in the United States, with currently over 2,000 sites of care anchored by 184 hospitals, 140 surgery center and GI centers, a growing network of various other access points, including urgent care centers, freestanding emergency rooms, over 1,400 physician clinics, and we operate in 43 markets across 21 states. And I'll share with you our strategy here in a minute. We support our local markets with the scale of HCA and what we believe are world-class support services, including HealthTrust Purchasing Group, which is our supply chain and GPO organization; Parallon is a revenue cycle organization, Sarah Cannon Research is one of the largest clinical research organizations in the country, and we have our own insurance and physician support and all the things that support delivery of care across our markets. We've had strategic guiding principles that have guided us for some time. It's to continue to invest in the clinical infrastructure of the organization, focus on growth through relationships with our physicians, stay attuned to local market dynamics and local market data. We focus on driving efficiency by utilizing the scale of HCA. And at the end of the day, HCA is a people organization. So we spend a lot of time investing in over our 250,000 employees across the HCA network. You may be familiar with the map. We have recently achieved a high watermark in terms of our market share, over 25 -- almost 26% in market share. You can see we've been in Florida -- about 50% of the company is in Florida and Texas. In 2018, the company celebrated its 50th anniversary. So we've been a part of these communities for a long time. We're an important part of the fabric of these communities. Oftentimes, we're one of, if not the, largest employer. We're one of the largest taxpayer in those communities. And you can see that we're first or second in 27 of the 37 markets that we study, and we are in 16 of the top 25 fastest-growing MSAs in the country. And when I conclude, I'll talk about the important attributes that we think of the company and clearly the markets that we operate in is a really important attribute. These markets are high population growth, good demographics, good economic indicators. And we have significant share across these markets. And we're an important part of the fabric of those communities. We exercise a disciplined deployment of capital. One of the strengths of HCA is the cash flow that we generate. In 2019, we generated over $7.6 billion of cash flow from operation. This chart is really kind of big numbers. We generated over $45 billion of cash flow since our IPO in early 2011. See, we allocate that through internal capital. So as we expand our facilities to meet the growing demand, internal capital to develop our network and deepen our service line capability as well as acquisitions to round out our networks, either in-market acquisitions or recently new market acquisitions, as in the case with Savannah, Georgia in early of '18. And we completed the acquisition of Mission Health in Asheville, North Carolina earlier this year. And then we've returned value to shareholders through mostly a share repurchase program. But as many of you know, we became a dividend-paying company 2 years ago as well. So I think a really another important attribute, the company has the financial strength, and if you followed our year-end call, you also heard that we are operating the company at the lowest leverage ratio that we've operated since probably over a decade since our LBO. Our stated leverage range is 3.5x to 4x leverage, and we were just above 3.4 at 12/31 of '19. And so when I look at kind of our growth objectives in the marketplace, our approach to the market is to be the provider system of choice in the markets. And simply described, we're developing breadth and depth; breadth of network capability with a diversified setting of care, hospitals, ambulatory surgery, outpatient diagnostic, physician clinics in a range of different access points. So there is multiple places patients can access the HCA network. There's multiple price points. And you will see that expands our geographic reach in these fast-growing markets. Concurrent with developing the breadth, we're developing deep service line capability so that we can take care of a full array of patients' needs when they hit the HCA network, from cardiology, from oncology to women services to emergency room services to orthopedics to neurosciences. You take cardiology, as an example. We have physician clinic capability, outpatient diagnostic, basic diagnostic cath, interventional cath, open heart, electrophysiology, structural heart and even transplant programs. In emergency room, we developed trauma programs; in neurosciences, we developed stroke institute; in women services, we developed neonatal intensive care units. And so that deepening of our service lines in these fast-growing markets with this broad network and deep service line has proven to be a successful model for HCA. Now we partner with our physician partners so that we can continue to deliver high-quality care across the network. And we've seen growing momentum. If you follow the results of the company, we're very proud with the long-term trends of the company. Over '18, '19, we see even growing momentum that we have in the marketplace. This is an example of one of our markets. I could flash all 43 of our markets, you see basically similar approach. This is our TriStar Health. This is our Nashville market. And you can see in Nashville, we have over 10 hospitals, host of outpatient imaging centers, diagnostic centers, 70-or-so physician clinics, building freestanding EDS. And you see visually on the map, what that does is expand our geographic footprint in this growing area. And also allows us to capture inbound referrals coming from more rural or secondary markets that are coming for tertiary care inside of these facilities, whether it be developing a trauma program in our Northern facility at Skyline while deepen our cardiology services in Centennial. You see that's basically the breadth of the HCA network in Nashville. I could show you Dallas or Denver or Miami or Tampa or Las Vegas or Northern California, and you see very similar approach from HCA. And we've been at this for quite some time. And we're investing in our network at record levels. We're investing in terms of our capacity, we're investing in terms of our capability, and we're investing in terms of our clinical technology on that. And we think that's a differentiator for HCA because in health care we don't compete with any one single system. Who we compete with are regional operators that generally operate within a region. And so that scale is an advantage for HCA, and our ability to innovate and share best practices. We may have an idea that's generated in Miami, I could take it to Denver and get first market mover advantage. We think our ability to invest capital and use the scale and the resources available at HCA is a competitive advantage for us. You'll see in a minute, we invested over $4.1 billion of capital just in 2019. That's to expand our facilities and expand our networks and deepening our service line capability. And then obviously, using our economies of scale, which we've done for a long time in the administrative cost efforts, now using our economies of scale and the way clinical care is delivered through adopting clinical health technologies across the network. This is an example of some of our capital investment. The dark blue line is our internal capital and the gray line is our acquisitions. And you can see in 2019, just under $4.2 billion of capital. And I tell groups, you should take that as a sign of the optimism that we have to put capital to work to grow and meet this growing demand. We brought on over 1,000 new in-patient beds in 2019, and we're still running the highest occupancy we've ran in quite some time. So that's a sign of that demand on there. So in our pipeline, we have about $4 billion of what we call capital in flight. These are projects that we've improved -- approved that are in some state of design or construction that will be coming online over the next 12 to 24 months, and that will fuel what we believe is future growth for the company. And then lastly, we are encouraged by our capital investments because we've been seeing growing returns on invested capital, just over 16.7% for the company. So we've been increasing our capital investments, increasing our returns, decreasing our cost of capital, by the way. And it's really allowing the company to produce really a significant amount of resources that we reinvest back into our markets as well as acquisitions to facilitate the strategic growth of the company over the long run. We invest significantly in the clinical capability of HCA. We're very proud with the clinical performance, and I won't go over all of these, but we really think a differentiator for us is when health systems invest in electronic health systems 5, 7 years ago, the derivative benefit now is that we believe we have the largest clinical data warehouse of clinical transactions of almost any organization in the country. There's largely been financial data and claims data, but now we have clinical data. And so we're utilizing that clinical data to improve the way and change the way care is delivered. And this highlights a couple of those. One of those is a spot program that we call, it's called sepsis. It's a spot to detect early detection of sepsis, where we put monitoring and surveillance over our clinical technology so you can identify the patient seems to be experiencing signs such as that we can respond. And we've seen decrease of sepsis mortality and decrease of sepsis shocks. And you can see a host of other things that we're involved with I think using the size and scale of HCA's capability to improve care and really exciting things going on in this space. And then lastly, I'll finish with this. We just -- we view this as advantages for HCA. First, the markets that we operate in. We're in fast-growing, economically attractive markets. We've been in them for a long time, and we have significant share. We think that our scale brings advantage both in terms of cost scale as well as clinical capabilities, make our operating culture and focused on our mission, which is taking care of people. And then ultimately, how do we use our financial resources to bring value to all of our stakeholders. So that's a quick summation of HCA. John, I'd be happy to take any questions you've got.

Bill, I wish you would talk faster.

Sorry, wanted to get to your important questions.

I thought Southerners like to talk a lot, little bit slower. So we had Premier here earlier and they're pretty alarmed about the mask situation, saying that we've got maybe 3 weeks of supply of these critical masks. So you said on a GPO, you obviously run a bunch of hospitals. So just getting beyond just the telescopic focus on mask, what is the -- what's sort of -- take us through the process, let's say a patient presents in your ER and you think he or she has these COVID symptoms, what's the process of protecting the workers? How do you triage these patients? Talk about your mask inventory, talk about like the -- just kind of take us through all that, what's your planning has been, and how...

Well, let me rise up a little bit for that. We have been in the planning stage as most health systems are, and it's unclear how this is going to unfold. But HCA has experience with these types of issues before. So we muster the organization and the scale. We activate what we call our emergency operations center. We've had that under time and really focused on our supply chain opportunities, focus on our facilities, focus on our workforce so that we are prepared if and when these cases present themselves. And so we've got activity underway. We've had for some time on each one of those, and we're feeling reasonably well on that. But I don't think anybody knows how this is going to unfold over time. But we've been at our supply chain efforts for quite some time. We feel there is clearly a level of supply chain that is at some level of risk in terms of either the manufacturing capability coming off-line in China or you don't have enough in the supply chain to meet, so you're looking for alternatives. We feel as reasonably good as we can at this stage with our supply chain look, all the way from mask, all the way to gallons and so forth. But I'll just emphasize, there's a lot of unknown. So you don't exactly know what the utilization rate is going to be in terms of patients present themselves. It's fortunately, mostly, in the planning process. And again, I think that's where the advantage of the scale of HCA comes to play where through our efforts and through our emergency preparation exercises that we've had in place with others, whether that was with Ebola, whether that with natural disasters that we experienced or even man-made disasters, we execute on this. So we've been at this some time. We're implementing precautionary measures on this. To your point, we're triaging patients ahead of time. We're screening them and if they're showing signs of either fever or respiratory, then you have a way to really isolate those patients. And then we obviously provide protective equipment to our employees so that they're protected as well. Fortunately, it's been a planning exercise of now. We've had a few patients who presented themselves. But that's, in essence, what you're trying to do is, you control the points of ingress to facility. You try to assess individuals as they present themselves to your facilities. And then based on that screening criteria, depending on where that decision tree takes you, you isolate patients that may be under investigation? And if not, you go through your normal course. So we have that unfolding across the HCA network as we speak.

So this may be not a fair question, but as we expand the testing capacity, right now, CDC has to confirm all the process, 4 days -- 3 to 4 days. Do you think that gets quicker because one of the issues...

I think it'll have to and it will need to on there. So I know there's discussion going on now is how do you increase that supply and increase that turnaround time because now you may have a patient present, they're suspicious. You're holding them for 48 hours or so forth, and you've got to treat them as if, and we'll have to really accelerate that testing process.

So one thing Tenet said was, they'd do an immediate like H1N1, like, they could just have a normal flu like that, that may be one way to rule out.

One, assessment patients present in the emergency room. Now hospitals already triage patients. So we're actually doing a screening in front of the triage to determine travel history, which is becoming maybe less and less relevant as this becomes more community based, but are showing signs of a fever, do you have any respiratory ailments and then start triaging those patients based on that initial screen. So we're putting really a step in front of the traditional triage right now.

Okay. So moving on, I'm sure you're tired of talking about this already?

No. It's clearly topical. Rest assured, we're spending a lot of our time preparing for it, planning for it. We've gone through these exercises before. I think how this is going to unfold over the coming weeks and months is unknown. So the best thing an organization like HCA can do is make sure we're in position. And really, it's focused around mostly those 3 domains, making sure we protect our workers first. That's our first thing so that we can deliver the care. Make sure we have the supply chain as secured as we can, and we've got visibility into at-risk supplies. And we think we have good visibility into that. And that our facilities in terms of how do we manage people through our facilities is an important aspect of that. In any given day, you could have 150,000, 200,000 people in an HCA facility. And so we spend a lot of time thinking about how do you think about visitor controls, how do you think about patients who present themselves. And in the event you have a case, how do you respond? So all of our facilities go through these tabletop exercising and these drills. And so we're trying to be as prepared as we can if this unfolds. But today, it's just unclear how it will unfold.

Not going to make a bigger deal out of this than it is, but I would say the -- I'm more familiar with Asheville, and being a little -- a different place, I would not say the local media has been particularly rapturous postmerger. So just an opportunity for you to provide. That was already a pretty efficient facility running at mid-teens margin. So what's -- what do you think has gone right, anything gone wrong? And what's your perspective on the Mission deal?

Well, there's a lot of press accounts in there. I'll tell you that we're very proud of Mission. We continue to believe Mission will be a very strong strategic facility for HCA. But you do go through changes and sometimes that change has disruptions. And we're having to manage through some of that. Some of those we're course-correcting where needed and trying to educate and communicate effectively where we can. And so I think anytime you go through a large-scale change, like Mission did, it's going to result in some change. And sometimes that has some ramifications with it. [ They won't be any necessarily. ]

Okay. As you think about the next 5 years, I mean, you've been -- you used to spend $2 billion a year, and you've stepped that up quite a bit. I mean so CapEx -- assuming CapEx stays at kind of this elevated level, is there any change in how you will invest in the future? My understanding is part of what you've done is you've done not just like catch-up work like new bed tower and branding, like it, but do you think the future looks more of the same? Are you...

I think, yes, and I wouldn't describe it as catch up. I think most of our capital has been opportunistic to capitalize on growth opportunities. And when we were spending $2 billion a year, we were generating $3.8 billion or $4 billion in cash flow. Now we're generating $7.6 billion in cash flow. So if you look at our CapEx spending as a percentage of our cash flow, it has actually stayed pretty consistent over those years. So as we've been investing more, we're generating more. As we're generating more, we invest more, and that gives us confidence that our investment decisions are right. But if you break down our capital investments, not to be repetitive, but it's around expanding our inpatient capacity because we're running at high occupancies. And if you don't bring new capacity online, it can be a growth limiter. Plus, in these markets we're in, we see great opportunities to put capital in line to grow, whether that be Miami, Florida or Denver or Dallas, or our home city of Nashville, we're investing in new inpatient capacity. And that's the most efficient capital investment we made because we're leveraging a fixed cost structure. We already have the support and mechanism away. Oftentimes, we have pent-up demand. And so those are very productive capital investments, but they take a couple of years to come online when you're putting $100 million or $200 million in a new tower on there. You have to make sure you're not disruptive to the existing operations. So we have to manage our pace through that. And then our network development, whether it be -- you saw, we have almost 100 freestanding EDs, probably 25 to 30 in our development pipeline right now, along with other investments to support our main campus. And [ 2 ] is where 80% of our capital investment goes. It's proven to be very productive. So I see in the short run more of the same on that. We look into our pipeline and we ask ourselves, are the projects that we're contemplating in the pipeline is productive and efficient as the ones we've already funded? And fortunately, the answer is we believe so. So we'll manage it and pace that at an appropriate level.

So one of the things about health care is it always changes more slowly than the Fabian, utopian envision it will. And so the Fabian thought, I guess I thought it bad, the utopians, Robert, Manuel brother, among others, that we were going to -- if you were to believe 2010, every hospital is going to be at full risk for every commercial life and would have 50 million people in exchanges. And so of course, none of that materialized. But when UnitedHealthcare, for example, says, we have 20% of our patients in a value-based arrangement, what does that look like? I know you're not at full risk. But what are you on the hook for these days in your kind of normal course commercial contracts versus, say, 5 years ago? Is that changing materially or is it...

I would tell you, no, it's not changing materially, but it's evolving. So we never believe that part of our -- if you looked at one of those strategic guiding principles is a well-informed response to the market and not necessarily chase headlines. So we think our strategies turned out to be right. But as you look at the progression of the revenue, and you can imagine HCA is big enough, you still have principally a fee-for-service revenue model. But we take risk in a lot of different ways. When I get paid a DRG for a certain inpatient service line, I'm taking risk under the guise of that. But right now, I would tell you, value-based payments come in the form of 3 or 4 different kind of categories. First is around pay-for-performance criteria in your commercial contracts that uptime your commercial contracts may have certain thresholds or activity to me and maybe readmission rates and maybe hospital infection rates and maybe certain things that you have to do in terms of reporting to that. And you have a very small percentage of the revenue of that contract potentially tied to that. The next area would be around what I would call bundled payments, both, we have that, as we know in CMS, but you see some of that in the commercial and then maybe orthopedics or maybe a very specific kind of service area on that. And then after that, it's more around very specific episodic risk when you carve that out. And ultimately, the high is a global risk plan, where you're basically taking full risk for a population. We don't think that's right for HCA because we don't underwrite it, we don't manage it, we don't price it. We do, do a little bit of it, so that we can learn and kind of test it. We do have some ACOs and Medicare Advantage relationships with payers on there, but it's not a big strategy of HCA. We don't see the marketplace asking us to move up that continuum. Nor do we see any value of doing that right now. Instead, our effort is focused on ensuring the HCA network is a high-value network, investing in our clinical capability, in our cost efficiency while we're delivering great patient service and experience. So there is, I would say, a natural evolution going up there, but by no means is it accelerating at a faster pace.

For example, let's say you for this particular line of service or DRG on a commercial rate, you managed to hold an infection rate below...

Threshold.

The readmission rate below Y. Should we think about that as, okay, you might have gotten $100 5 years ago. Now you get $96 and a 4% tip, if you do this or if you do...

I'd say this is a little off. I'd say $99.5 and you get a $0.50 tip.

That answer has not changed.

So when you think about the size, for us, these big contracts, what ends up happening is a percentage of your annual inflator is, so -- is on there. So it varies. I don't want to -- it's an important area. And we are willing to do that because we're willing to put our network up. I think when you get -- so those issues don't bother us at all and we end up working with our payers, I think, very collaboratively in that area. But in terms of just downloading full risk to us where we don't price it, we don't really manage it, we don't underwrite it, that's not something that we see as a strategic value to us. Our effort is really ensuring that we distinguish the HCA network as a provider system of choice.

Just last one for me. Your industry, not HCA necessarily, really struggled for a long time to employ physicians and make that line of service even [ go ] to profitability. What kind of strides -- not something really that gets talked about as much as maybe 2, 3 years ago, but how is the employee-physician model evolved or not? And is this something that you have to look at it as a loss leader or other strides that you've made to turn that into a money-making line of service.

Well, having relationships with our physicians is important, we have 40,000 physicians, maybe a little north of that to support the HCA network. We do employ 10%, 15% of those, and it varies from market, market by market. And we have relationships with physicians in a variety of other structures on. So employment of physicians is still there. We think we're a little more better at employing physicians today than we were 5 years ago, just in terms of our capability and our infrastructure and our ability to manage it. And we think that we're able to network our employed physicians more efficiently to support our network today, but it's still an important factor when you're running a hospital. Most physicians still are independent affiliated physicians, but that's going to change over time. And we see that continue growing. It's not 20% a year like it was 5, 6 years ago, but there's still -- and they come to market by market pressure to employ physicians because they're looking to join up with systems and needing security. And we're prepared to do that when necessary. But we don't see that really accelerating any faster than it has for the past couple of years. But I'll always remind people, if you had a personal P&L hovering around, you'd be a loss leader, too. So you have to look at the fact that...

I think the most profitable employer.

So we don't look at that by itself, it's an important part of just being able to deliver high-quality services in the market.

So do you have the ability and, more importantly, the willingness, well, let's say, you have 26 doctors doing knees replacements at Brandon Regional, what would you say to the 26th best doctor or a.k.a. the worst doctor. How do you get information to doctors to benchmark their outcomes?

Well, we have a whole group called -- our clinical services group, which is run by doctors. So 26 doctors aren't going to listen to the CFO on that. So we have our clinical services teams as part of our clinical investments we've made over the past decade, organized around service lines: orthopedics, cardiology, oncology, general surgery, robotic surgery and the like. And we really think the value proposition will serve you be part of a national system. So we're linking our orthopedic surgeons together and how can they learn from each other? How can they utilize their clinical data? And how can they -- so we have all kinds of clinical technology, same with our cardiologists. And how do we use our leading cardiologists to help the cardiology services across all of our markets, whether it be from looking at adoption of technology or practice techniques and so forth. So to your point, it's really rooted in building those physician communities that are service line specific and data-driven and outcomes driven, and we're doing that in our key service lines. Orthopedics, we are definitely doing that. Cardiology, oncology, neurosciences as a service line, robotic surgeries, and we really think that's an important value proposition of that. But if you -- within any group, you're going to have variation, and you hope that group has management techniques, and we try to share as much clinical information as we can.

Got you. Okay. We go to breakout. Thank you.

All right. Thank you, everyone.