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

Okay. Great. Good afternoon. I'm Steven Valiquette, the health care services analyst here at Barclays. Welcome to our next session of the virtual version of the Global Health Care Conference. This will feature HCA, obviously, largest hospital operator in the U.S. Now with us from the company are CFO, Bill Rutherford, for this fireside chat; and also, Mark Kimbrough from Investor Relations is also on the line. So gentlemen, thanks for your flexibility around this change in venue and welcome.

Sure, Steven. This is Bill, and good afternoon, and thanks for having us.

Okay. Great. So I guess it seems fitting we should kick off maybe with a coronavirus question. Obviously, investors are heavily focused on this. And we've had some sessions earlier today as part of the conference talking to payers, but I think investors want to hear about it from a major provider side as well. So maybe you can just provide some framework for how we should think about hospitals in the context of all the puts and takes around COVID-19 or coronavirus, whatever you want to call it. Maybe let's just start around like community transmission. Maybe just high level, how do you handle screening patients who show up in the ER? And then I got a bunch of follow-up questions from there, but let's just start high level on just how you handle that.

Yes. Well, let me start -- yes, let me start a little bit higher level than that, Steven. So we've been in our planning and preparation phase now for a couple of weeks, as I think most health systems across the country. And I do think the advantage HCA has with the scale is we've utilized our scale before in preparing for events like this. This one does seem a little bit different, but we've been preparing. Our focus has really been around 3 kind of primary areas. One, around our facilities, making sure that we have our facilities, ingress and egress areas, kind of reduced down so that we can manage the access points. We're focusing on communicating with our nurses and our clinical workers to ensure that we can provide them a safe environment of care, and obviously focused on securing our supply chain apparatus to ensure we can have an adequate amount of supply chain in the event that this does surge on us. So we've been planning for several weeks now. I think we're as -- in as good a shape as one can be. It's obviously going to be hard to call how this will unfold, but we think we've been prepared for it now. And answer to your specific question, what we've tried to do here is to reduce the number of access points coming into our facilities and provide initial screening for patients as well as employees and our visitors, where we basically go through CDC's screening criteria on the front end. And then based on your response to those, then we'll mask you and segregate you or let you flow through into the, let's say, emergency room, where you would go through typical and normal triage protocol. So we've enacted a number of kind of precautionary measures, as I think most hospitals and many health systems all around the country are doing as we speak.

Okay. Great. Curious, we've heard at least 1 or 2 of the payers talk about it as, hey, just perhaps investors could think of this as maybe just an extension of like a flu season. So I don't know if you, from a protocol perspective, kind of think of it the same way. And how this compares to historical situations that are kind of flu-like, whether it's swine flu, avian/bird flu, SARS, MERS, whatever you want to call it. But I was kind of curious if that's a right framework to think about this and also the way you're thinking about it as well.

Well, we've had events in the past beyond just the seasonal flu that we prepared for. Fortunately, all of those did not materialize, whether it was Ebola, whether it be SARS. We had a little bit in the H1N1 over a decade ago. So we've prepared for this. This one does seem a little different just given the paranoia that seems to be out there in the community. I'm not so sure it will turn out to be any different. We're just going to have to wait and see. But we're treating this seriously, as you would expect, and trying to ensure that we've got the right facility protocols, we've got the right supply chain with the personal protective equipment and, most importantly, that we're communicating with our clinical workers, that we can provide them a safe environment of care and protect them so that we can serve the patients that do show up. So again, I think it's early stage and how this is going to unfold is just unclear. But I think a lot of the preparation and planning exercises are similar with past events that we've prepared for. Fortunately, those didn't materialize. We're just going to have to wait to see how this one plays out.

Okay. Yes. So it's definitely unclear as far as prevalence and all that. But I hate to use the word pandemic, but let's just say if this did sort of balloon into something pretty big over the next 12 months or whatever time frame you want to use, at the end of the day, just from like a pure profitability perspective of volume that might be tied to this, is this something that would be net positive for hospital industry and for HCA in particular? Or could it be net negative in some way? Or is it neutral? I mean, just directionally, how do you think about it if it did turn into something larger scale?

Well, honestly, I have a hard time characterizing it as a net positive. Our goal is to be able to provide care to our community on here. And who knows how it will unfold? I think there's factors that you evaluate. Right now, our factors is how do we service an increase in utilization that we may see if, well, we do start seeing a surge in our emergency room because people are concerned they've had some exposure to this virus. So that's our first priority. In the event you do have an increase in utilization, the second question becomes: How does it impact your traditional business? And how do you manage through servicing the increased utilization of people who may show up suspected exposure versus what impact does it have with other elective business? And that's what we try to plan for and prepare for and model for. But again, it's obviously way too early to call. But those are the things that go through our planning exercises as we speak. We have each of our facilities run drills, and each one of our facilities run tabletops to make sure that they are prepared to manage an increase in presentations or utilization and also they're prepared to figure out how to manage the capacity of existing scheduled business, whether that be outpatient surgery cases or other kind of elective activity. And it's unclear what impact that may have on some of that business. But that's where we spend our time planning for and drilling for, and I think we're as prepared as we can be in that situation.

Okay. Okay. Not to beat this topic to death, maybe just 1 or 2 more questions around this since it is just so topical for investors right now. But obviously, most publicly traded payers and providers typically don't want to talk about utilization trends for any short-term period. But you talked about impact on the existing business. And there are some parts of the U.S. population that are somewhat going into hibernation mode, for lack of a better phrase, in certain regions. So I'm curious if you're able to comment at all. Just in the month of March, has there been any sort of drop-off in elective procedures or any other notable volume trends in the rest of your business that could be softening a bit in relation to this whole dynamic?

So as you know, we don't talk about activity within a current reporting period. I will just say the events have been very isolated, and so it hasn't had that type of impact. But it had been very isolated events for us right now.

Okay. Okay. And then last question around this whole thing. 10 days ago, this seemed -- it was top of mind. Now it's probably falling down the spectrum of things that are critical. But obviously, there was a lot of talk around supply inventory, masks, gloves, gowns, et cetera, as far as contingency planning around that. I mean I got to believe HCA would have some clout with GPOs and suppliers on -- in probably getting whatever you need. But I'm just curious how you think about any sort of supply shortages for your business in relation to just an overall situation.

Well -- yes. Well, I think that's clearly a key topic in this environment that we're in and the risk of some disruption in the supply chain that may occur either because we need the personal protection equipment to handle an increased utilization or other manufacturing just goes off-line from China manufacturing sources. And so that is an area, as I said, one of our focus areas. I think we're as in good position as a health system can be. I do think that's where the scale of HCA will add some value because we have warehouses and we have a large group purchasing organization. We have a large distribution network. And so we can move inventory and supply around where it's needed. But I think today, it's clearly a risk area that we highlight, but we think we're as in good position as we can be relative to that. And again, in the planning and preparation stage that we are in now, that's something we spend a lot of time in of how do we continue to get some assurance on the supply chain. But at the end of the day, if some of those manufacturing capabilities would come off-line, there's not that much supply out there. So we're trying to keep track of all that, implement the appropriate utilization of current inventory controls. And again, I think where we are today, we feel reasonably well. But if this thing unfolds at a dramatic, accelerated pace than we are now, that's, I think, an area that the whole industry will have to pay attention to.

Okay. All right. Great. Okay, so let's shift gears here a little bit, maybe talk about some stuff that's more specific to HCA and your operations. So obviously, for calendar 2020, I guess it had been talked about a little bit on some of the prior investor conference calls, et cetera. But as we think about the comparison period for upcoming 1Q '20, I mean, obviously, you had a pretty strong quarter in 1Q '19 last year with some pretty strong growth in same-store revenue and EBITDA growth. Just remind us again how you sort of factor that into the guidance for 2020. I don't know if you're able to talk about anything, either quarterly or seasonally. Just remind us again how you kind of -- maybe just how we should think about that for 1Q '20, taking -- or just given that tough comparison.

Yes. Well, as you know, we don't give specific quarterly guidance because it's hard to call cyclical trends quarterly -- by quarter. But when you back up to what happened in '19, the year did unfold, at least beginning a little differently than we anticipated. As you mentioned, we had an extremely strong first quarter. And then by others' reports, our second quarter was a little soft, although we weren't that far off our internal budget. And we said during that time we felt our year-to-date trends were more reflective of what we anticipated. And indeed, that was really what third and fourth quarter ended up turning out to be. So first quarter was strong. I'll just encourage you -- people to keep that in mind when they do their quarter-by-quarter comparisons. I will mention that we did record a payer settlement pickup in the first quarter of approximately $86 million. And so you don't plan for those to repeat. But even without that, we still, I think, were 15%-or-so growth excluding that. So that -- those quarters last year didn't line up exactly like we wanted to. So I think that may have some impact on quarter-by-quarter trends. But again, I think we tend to take longer-term views, and our year-to-date kind of guidance that we issued in terms of our 2% to 3% expected same-facility volume growth and 2% to 3% rate growth, I think, holds true. And then it will be really dependent on a variety of factors how that unfolds in any one quarter to the next. But first quarter was strong last year. Second quarter was a little soft. And so I imagine most investors are keeping that in mind as they think about their quarter-by-quarter evaluation.

Yes. Okay. And I know you mentioned earlier on this call that you don't want to talk about any quarterly trends or quarters you have not reported yet. But just in the context of just the regular flu season, any comments you're able to make on just flu prevalence this year in 1Q as we got into the heavy months and just how you look at that on a comparison basis year-over-year?

No. I would just -- I would say you track your CDC trends, and you can -- might imagine we'd see similar trends as what the CDC did. But no specific comments in the first quarter on that right now.

Okay. Okay. So again, shifting gears here again a little bit and just talking about just overall volume trends in the hospital sector and for you guys in particular. Volume was definitely a bright spot really for the whole peer group in 2019 and certainly more as the year progressed, it seemed like. But your numbers really stood out in the fourth quarter. Just to reemphasize some of the strength that you saw, is there any color and just additional things you can provide in terms of what was driving some of that strength as you were exiting 2019?

Yes. I'll talk general. Again, we're very pleased with the volume picture of the company. As you know, same-facility admissions in '19 were up 2.8%. Same-facility equivalent admissions were up 3.5%. And we did see that trend upward in the third and fourth quarter. A strong first, softer second and good third and fourth quarter. I think there's 4 or 5 things that we talk about when I think about the volume component of HCA. And again, I think it doesn't always come even quarter-by-quarter but over trend. And over time, we see still solid momentum in our markets. I think that's really first with we've -- still see strong kind of demographic and population growth in the 43 markets that we operate in. We still see strong economic indicators up until kind of this recent week of stuff, but we still see good employment numbers and good economic trends in our markets. So those are 2 fundamental things that we think, overall, provide organic demand growth in our markets, probably between 1.5%, 2.5% over a period of time. And so we're able to just -- if we just maintain our share, see some organic growth in the markets that we operate because we're operating in pretty large, fast-growing economically vibrant markets. And then on top of that, we think our capital investment program is allowing us to capture share. We returned -- capturing 20 to 30 basis points of market share over a period of time. And that's from building new inpatient capacity, expanding our network capabilities and investing in program and services. And we think that is helping our volume metrics that we've been able to post of late. And then I'd be remiss if I didn't call out that our teams are really executing at a high level in terms of detailing their markets and developing relationships with our physicians, focusing on program development. So I think the fundamentals, when we turn the calendar, we felt pretty strong that the demographics and economic trends were positive. I think our capital program continues to provide momentum for the company. And then just our team's ability to execute on our business strategy, I think, has all kind of coalesced in what we saw in the second half of '19. And again, when we turn the calendar, we felt positive that those trends had a reasonable chance of continuing.

Okay. Great. All right. And then for investors that follow the company a little more closely, back in mid-2019 when the same-store revenue per adjusted admission kind of fell off a little bit, the stock took a pretty big hit on that. I think at the time, you guys suggested that, that should probably improve as the year progressed. You were confident that would improve in the back half of the year. While it did improve a little bit, it wasn't -- it didn't get back to the levels it was at in -- at least in early 2019. I don't know, as we kind of think about that metric for 2020, is there still some low-hanging fruit that you see that might allow you to improve that metric? And -- or is that just sort of serendipitous tied to the acuity of the volume that's coming in the door? Just curious to get your thoughts on that metric for 2020 that [indiscernible] a year ago then.

Yes. It's a little bit of both. I don't see any silver bullet on there. We finished full year 2.3%. We said we think 2% to 3%. And -- but to your point, we were soft in the fourth quarter; we were 2% in the third. I think there are some factors there that influenced that, but -- and I'll come back to that in a minute. I'll start with we don't -- I don't see and we don't see anything structurally changing out there that's influencing. I think it is, in any period of time, some acuity driven. We talked about in the fourth quarter we saw growth in our medical admissions versus our surgical admissions that was a little soft. When I think about the fundamentals, we still think we have reasonable and actually pretty good Medicare pricing updates for this current fiscal year. We have good visibility into our commercial contracts, as we've talked about publicly before. We don't see any really major changes going on with any one of those. So we still are investing and aiming to grow higher-acuity services. But from time to time, we -- the medical admissions or outpatient or surgical admissions -- our surgical growth was still reasonable. We were a little north of 1%, but our medical admissions were 2.5% to 3%. So that influenced that. So -- and as we gave our guidance, we still expect to fall in that 2% to 3% range. We'll have to see how that unfolds on there. I do think, when you go back to '17 -- late '17 or early '18, we probably saw some outpaced revenue per adjusted admission and CMI and acuity growth. So we were also facing a little bit of a tough comp in the fourth quarter of '18. I think we grew our revenue per AA of 4.5%, 4.4%. So we had really unusual growth of higher-acuity services in '18. So the year-over-year was a little softer on a comparison, but nothing structural there. But in any one period, it might be on the low end or a little below that, too. But over a longer-term period, we think we can still land within that 2% to 3% range.

Okay. All right. Perfect. Last question. This kind of ties back more to an industry-type question. But as far as the hospital pricing transparency regulation, I think last time I led, it's still scheduled to take effect in Jan 2021 unless something changed again here recently. But...

No. That's my understanding, too, yes.

Okay. So I guess in light of that, are you guys preparing for that January implementation of the regulation? Or do you think it could get delayed? I mean what do you have to do to kind of plan for that, if anything...

Well, we are planning for it given that it's -- we are planning for it given it's slated to be implemented January. We have expressed our concern with the regulation, and I think there's going to continue to be challenges with the regulation. We'll have to see where that plays out. But right now, we're preparing for it. And if we have to comply with it, we'll -- we -- obviously, we will comply with it. We believe in many of the principles that transparency is trying to address, which we think is to help that individual gain a reasonable estimate of the cost of their services when you can prior to service. We know that, that estimate of what their out-of-pocket is going to be has more to do with the type of coverage they purchase more so than any kind of charge or activity we have. We don't believe that necessarily disclosing negotiated contractual rates between a payer and provider necessarily advances that cost. And so that's what we're concerned about, just the complexities of the individual pricing. But we've had tools in place for some time that if you were shopping for services inside the HCA network, we could give you a reasonable estimate of what your liability would be. We are beginning to pilot some online tools, and we've had mechanisms to do that for some time. So again, I think we support transparency when it relates to helping the individual gain an estimate. I think just disclosing negotiated contractual rates between 2 commercial parties isn't necessarily going to clarify or advance that cost, so we do have some concerns with the current regulation and how it's stated. But in the meantime, we're preparing for it in the event that we do have to comply to it and it doesn't get either deferred or challenged in some way.

Okay, great. With that, I think we're out of time. So I definitely want to thank you guys for your time today and enjoy the rest of the virtual conference.

Okay. All right. Thank you, Steven. We'll talk to you.

Bye. Thank you. Bye-bye.

Okay. Thanks again.