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

All right. I want to thank everyone for joining us. It's my pleasure to be hosting the BofA virtual Health Care Conference here and be introducing HCA. HCA is the largest publicly traded hospital company in the United States. And presenting today, we have Bill Rutherford, who's the CFO; as well as Mark Kimbrough from Investor Relations. And with that, I'm going to jump right into Q&A. So thanks, guys, for coming.

Obviously, COVID is kind of the key topic on everyone's mind today. Significant impact in volumes in April. I mean how are you thinking about the timing and pace of volumes returning through the rest of this year? Maybe start off by what you're seeing, if you can, in May so far.

Sure. Great. Hello, everyone. It's Bill Rutherford. Kevin, thanks for having us. Be happy to address your questions. When we think about volume returning, and I'll go back to what we talked about in our call, we see phases during this pandemic. And clearly, we started in middle of March with the response phase, and it kind of peaked for us in the middle of April. We believed that we would be entering into a reboot or a restart phase throughout the end of the second quarter. And indeed, we're starting to see that. I'll share with you some early numbers in a minute. And then eventually, once we go through kind of that reboot phase, we're going to be in a recovery area. And obviously, there are still a lot of unknowns about how long that recovery, how quick volumes do return. So we don't really know. We think we have -- HCA is in as good as position as we can be from an operational standpoint to be able to serve that volume when it returns. And before I share with you what we're seeing in the last half of April and May, I go back to really our guiding principles that we talked about in the call, too. Really, if you boil it down, our initial principle was to protect our employees and our physicians that we could provide a safe environment, protect them from an employment standpoint and really protect the financial wherewithal of the company. And we think we've done a very nice job and put the company in very solid position. In the call, we shared with you what we were seeing in the first 2 weeks of April. We typically don't share inter-quarter guidance on here, but given, obviously, how unusual this is, we thought it was important to update you. And if you recall in our call in the first 2 weeks of April, our inpatient admissions were down about 30%. We thought they had begun to stabilize in terms of that decline. And indeed, that was the case. The last 2 weeks of April, we started to see some recovery of that. In the last 2 weeks, we were down roughly 20% from prior year. And really, the first week of May, it looks like we're down just under 15%. So we're starting to see some of that restart process occur with different communities across the HCA footprint. We're seeing that and other statistics that we shared about as well. Recall we talked about inpatient surgeries were down about 50% in the first 2 weeks of April. In the last 2 weeks, they were down just a little more than 30%, and in the first week of May, down around 20%. So we're -- again, another indicator that we're starting to see some of that volume come back. How quick, how long it lasts are clearly unknown. Outpatient surgeries, if you recall, was an important statistic. In the first couple of weeks of April, we were down about 70% when you combine both our hospital-based and ambulatory surgery. We've started to see that come back. Our hospital-based outpatient surgeries were down about 50% the last couple of weeks of April, and we're hovering on the hospital side just under 20% right now. Our ASD volumes are probably hovering around 40% to -- 35% to 40% of their historical trend in early May. So we think what we had anticipated is that the recovery period or the restart period would begin towards the latter part of the quarter -- is beginning to happen. We're still early in that stage. So how quick and how much of that lost volume can be recaptured are still unknowns, but we think we're starting to see at least some signs of that volume return to us.

That's great. That's really helpful. I guess when we think though -- and I know you just kind of said it's hard to figure out exactly when, but you guys have a sense for when you think volumes would be back? And are we talking about Q3? Is it possible? And I guess if you think about the volume that hasn't come through, what percent do you think will actually get rescheduled that the -- do you think this could be a period of time where we see above-average volume?

Yes. I think it will vary market by market. And I think it will improve as time goes by. We are hearing that -- we're trying to make sure we have the prerequisites in place early that we've got, working with our physician affiliates to give them confidence we can serve their patient loads. I think we're doing a very good job with that. And then ultimately, as -- when do patients feel confident enough to return to the settings of care? So there are variables that are still not clear about how they will play out. We do believe we'll be able to recapture a fair share and hopefully a significant share of those procedures and cases that were deferred, but we're going to have to just have a little bit more time to see how that plays out. I think it's an iterative process. I think our physicians are wanting to get back to service. And as we kind of pull our markets across the HCA footprint, I think we're in very good shape with them. Then it's a matter of just when do patients want to return. And so we track our scheduled cases. We're seeing those schedules beginning to get filled out now that -- many of our communities are just now relieving some of those travel restrictions and some restrictions on elective surgery. That's kind of cascading throughout our footprint. So I think we're going to need a few more weeks, but we -- we're reasonably confident that we are in good position to be able to serve those deferred cases when they're ready to come back.

Yes. And so I guess when we think about that pace of volumes coming back, you mentioned kind of consumer willingness to come back, is there anything else that you think about that will be a gating factor? Do you have enough capacity? Do you have enough PPE? Are there any inefficiencies you're building in from a safety perspective that just makes it harder to turn over ORs or anything? I mean how do you think about your ability to take that volume if it does come back?

I think we have great ability to take that. I do think, to your question, there are some prerequisites, and we feel -- and we are in a very good position relative to those prerequisites to ensure we have PPE supply, and our supply chain teams have done an incredible job. Secondarily, to make sure you have adequate testing, and we have various algorithms we use for different clinical cases for testing and pre-procedure testing. So we -- again, I think we feel very good with that. And then our focus really, as we begin this restart, how do we, in the most efficient manner, bring the capacity back online in concert with when the volume is ready to return. And so as we talked about in our call for some time now, we've had multiple work streams underway about how do we efficiently bring that capacity on to meet those needs. And so it's a multipronged approach to: one, yes, make sure we have the prerequisites in the supply and lab; two, communicate with our physician partners and our colleagues to understand their needs and desires and to give them confidence that the -- our HCA facilities are ready and prepared to serve their needs; and then how do we help them communicate to their patients that indeed it's safe to return. And I think that's an iterative process that occurs and will continue to occur throughout the balance of this quarter.

Okay. That's helpful. And then I think one of the more lasting impacts of COVID is going to be the recession. How do you think about your ability to grow during the recession? You guys have given kind of that long-term EBITDA outlook of 4% to 6%. Can you still do something like that during a recession? Or maybe just your thoughts there.

Well, we draw back on our experience in the last recession, but we all acknowledge, I think, that this is different. And so we don't know -- ultimately, we believe -- continue to believe in the fundamental thesis that HCA was -- that we're in -- we operate in good markets and that they're favorably positioned and HCA's network is well positioned to serve those patients and those -- and that demand in our markets. Ultimately, when you say we're able to grow, I think, in past recessions, we were able to match our cost structure with our revenue. And even those periods, we showed some growth, although maybe had modest. So question ultimately in front of us today is how long is that cycle and how deep is it in terms of how impactful it is to the different communities, and then ultimately what is the base you're growing off of. And so we think there's going to be this period of time that's a recovery period. And as we said, I think there's just so many unknowns. If volume returns and the economy improves with employment and so forth relatively quicker, then we feel confident that we can return relatively quickly. If it's become more prolonged and that there's economic pressures, it will take a little bit more time. But I think we've proven from a management standpoint we can match our operating expenses reasonably well with the volume trends and then over time, I think, differentiate HCA through a variety of different characteristics. And then if you reflect back to past recessions, I think, as we all know today, there are some things that are different in terms of when does that impact show itself in terms of health care demand, health care coverage. Clearly, there are some things underway that did not exist last recession with Medicaid expansion in certain states, with the opportunity to take advantage of subsidies of health insurance exchanges, and there's continuing ongoing dialogue about coverage extension. So I think all those tend to be variables that we're just going to have to wait to see how they unfold. But I do think it buffers over some period of time, the impact that it will likely have -- that could have in the demand profile across our markets.

And how should we think about payer mix shift? Like what's the relative rate differential between a commercial employer-sponsored life, an exchange life and a Medicaid life?

Well, there is a differential. And without giving you exact numbers, clearly commercial side is our best payer; HICS would be your second best; and Medicaid, I think, is well known, doesn't cover our cost. And so -- but it's better than an uninsured patient where really the impact to us is the cost of providing that. So again, I think we're just going to have to wait to see what ultimately -- how does that payer mix shift settle out to see what the long-term impact to our revenue would be.

Okay. And I guess disruption can also be an opportunity. Do you -- how do you think about COVID and/or the recession impacting the potential M&A backdrop? You guys have been more active on the M&A front over the last few years. Is this slowing down deal discussions because people are focusing on operations? Or does it kind of bring things to the top because companies are realizing that they're not really stressed out the way they need to be?

Yes. I think reality, what it's done in this near term is paused everything, just given everybody is focused on providing the services and making it through this kind of response and recovery period we're going to be in. And then ultimately, my view is that I think, depending on how this settles out, it may provide some catalyst for other health care providers to look at some transaction. Historically, you've needed a catalyst, and those catalysts have historically been systems being challenged from a financial or economic standpoint or some uncertainty about their future. And so this could be a catalyst going forward. I think we'll just have to wait to see. But if more health care providers have some financial or economic challenges, then that has proven historically to be a catalyst for more M&A. And then ultimately, on our side, it's a matter of when are we confident to go after some of those M&As. We still pride ourselves on being very disciplined and very diligent as we think about strategic acquisitions for the long-term growth prospects of the company. So yes, I think there is that potential. We'll just have to see how the environment plays out over the next 12 to 24 months.

Yes. And I guess what are you looking for then when you think about putting capital back to work? What are you -- if you were going to -- do you need to see before you feel comfortable doing that through share repurchase or dividends or deals?

Yes. It's a good point. I think the simple answer is we're waiting to see how the volume settles out and the mix. How does revenue settle out compared to what we think it's going to settle out versus historical trends. And when we get a pretty good read on the stability of that, once we get through this -- we've been in a response where we had a very sharp decline in our volumes. We see a recovery, as we've talked about, through the second quarter, and I think that'd be a bounce-through. And then ultimately, how does it settle out as we go through the balance of '20 and into '21? And once we have a good read on the volume and the revenue profile, then we can evaluate what are the most appropriate capital strategies for us to return to. And I think we have a long track record in HCA of having a disciplined approach to capital allocation between the right amount of internal capital investments to facilitate growth and the needs we have as well as adequate amount of return to shareholders. So I think when we get into the balance of 2020, we'll have a better understanding of how the volume profile settling out, how the revenue's settling out and then we'll make the appropriate capital decisions at that point in time.

And I think we're all hopeful that we don't see any kind of second wave of COVID. But if we did see one, how do you think you guys are positioned to deal with that versus how you dealt with the first round?

Well, honestly, I think we dealt with the first round very well given all the circumstances. I think the strength, the character of HCA really showed itself, and we were able to stand by our guiding principles. So I think we did very well on the first round given all circumstances and how quick it hit us. And you can be assured that as we think about going through these different phases, the various work streams we have, we're giving a lot of attention to continue to prepare HCA very solidly to prepare for any future rounds that we may have. So we think we are in as good as position as we can be given the circumstances, both from not only just the financial aspects but as we're thinking about supply chain mobilization, as we think about lab testing and as we think about some of the other principles that we stayed true in the initial response. Then I think we can only get even better prepared if we unfortunately happen to see a second wave.

And then one of the things that you guys did, go back to the balance sheet for a second, is you had a pretty significant cut to CapEx spending. Is that -- does that CapEx spending fall in that same bucket as kind of like you shouldn't really expect much this year but reaccelerate in 2021 as things normalize? Or is there a different bar for when you kind of bring that CapEx spending back? And what exactly did you defer? And is that going to have any impact on your outlook for growth?

Yes. I don't think it has an immediate impact on our growth. A lot of those were deferrals out. It was a combination of deferring some technology capital investments as well as some retain. And then there were some early-stage growth capital that would have been planned to begun -- begin in the balance of '20 that we paused on. And so when you look at really these longer growth capital projects, the projects that came on late '19, early part of 2020 will continue, I think, to provide growth as long as the business returns at the pace we think is reasonable going forward, and we don't think these decisions that we've made in our early response is compromising the long-term growth. And we're going to continue to reevaluate when do we return to a capital level when we see just like the previously said volume and revenue settles out. But I do think that the organization and the company move very rapidly on a variety of responses in terms of our principle securing the financial aspects of the company. We were -- early on, as you know, secured an additional $2 billion in our credit facility. We early on suspended the share repurchase program. We made what were, I think, pretty significant slowdowns in some of our capital spending. We are implementing some of our Stage 1 discretionary cost efforts. And then we did a lot of those before we had visibility of the CARES Act. So the company is, again, I think, in as good position as we can be given the circumstances from the financial standpoint, and we will continue to evaluate the business and determine when do we turn some of those things back on. But it's likely late 2020 and as we go into our '21 planning horizon.

Yes. One of the things that I've been asking everybody is what do you think the long-term implications of COVID are going to be. Is there anything that you're doing operationally or how you serve patients or anything about how the patients are accessing the health care system, sorts that they're asking for, et cetera, that you think might persist even once COVID is behind us?

Oh, I absolutely do. And we'll see how deep they get in. But telehealth, I'm sure others have given you an example, is one. We went from a relatively small volume of telehealth to doing well over 10,000 telehealth visits a day very, very quickly. And I think that clearly was in response to the environment, but that will continue. And so how patients and providers interact digitally will be there. How do we think about the efficient use of capacity even more so than we had already done. I think how do we communicate with our patient populations. Maybe not going to be a whole lot of waiting rooms perhaps in this near term. So we're working on digital strategies to interact with our patients about when -- if they have a scheduled procedure, how do they actually present inside a health care facility. So I think there's a variety of potential things that, having to respond to this, probably accelerated through, I think, our system and probably many other provider systems across the country.

Yes. And I guess -- I don't know. I know you guys don't have guidance, but it's a little bit hard to maybe answer this question directly. But I guess when we think about in the past your ability to flex costs, as you kind of indicated in the past, the government stimulus money that's come in to kind of support things, I guess I would have thought that the EBITDA infrastructure of HCA would have been a bit more, let's say, resilient, so maybe that's what I'll use, during a pandemic like this, that you might not have had to take the actions you took on the balance sheet and the CapEx given the cash flow you're already generating. So even forget cutting half, it's still significant cash, et cetera. I don't know, I guess it's kind of interesting to see how much of that is just being kind of prudent to uncertainty versus how much of that is kind of a real kind of concern that it really did need to happen at the time.

Well, I think we know today that this is an episode or event that we've never seen in our careers. I think HCA is very resilient. And I think we had done a lot over the years to position HCA to be very resilient. So some of the actions we took early on were before we had insight into the government stimulus efforts on there. And maybe some of the things we did are, like we talked about in the call, out of an abundance of caution. But I think those are prudent management steps given that we were facing an environment that we hadn't seen before. And I think HCA's resiliency will continue to show itself as we go through these different recovery periods. We're thankful for the government work. I think that's strengthened us even more. As we talked about on the call, we received just over $4 billion of accelerated payments. We know that will need to be repaid over time. We talked about in our call we had about $700 million of CARES Act at the time. We filed our Q last week. We updated that to just approximately $900 million of CARES Act funding, and it stands a little over $1 billion today as a couple more tranches have been released. So those have been very helpful for us. So I wouldn't read anything other than what we were doing was to ensure the financial resilience of HCA remains strong. And again, I think we're as in good a position as we can be given the circumstances. Perhaps in hindsight, some of the things we did will be out of an abundance of caution, but I think all of those are very prudent management actions that we took at the time.

That makes sense. I guess prior to this, you guys were growing volumes pretty well in January and February. I mean how do you think about what the long-term growth of volumes is in your market? How much of that has to come from gaining share and investing in CapEx versus just kind of long-term demand in your market?

Well, I think long term -- and, as you know, you've followed HCA for a while, and those of you who've followed HCA, I think we have a long track record of being able to show growth over 20-plus years. And we know there, from time to time, are going to be kind of macro cycles that we have to manage through, and we think we've proven over time we're able to manage through those cycles. Fundamentally, the premise that HCA continues to be built on, I think, still stands even though there may be some cycles we have to weather through, that there's -- we're -- operate in very robust and strong markets. We think we can distinguish the HCA network as a provider system of choice, and we can utilize our scale and our capabilities to bring value to all of our constituencies. And we think, over the long run, those fundamentals will continue to serve all of our constituencies well as we continue to meet, I think, growing demand for health care in this country. In this cycle, it really will ultimately depend on what are some of the more macro events that we have to manage through in terms of the economic trends in some of our markets, how quick is that recovery, what are some support programs that are going to be out there for individuals on there and how quick some of our communities can return to a pre-pandemic level. And again, I think we're as well positioned to manage through that. And over the long run, we continue to believe that distinguishing the HCA provider network as that system of choice in these very large, very historically fast-growing markets are good fundamentals for us to operate on.

Yes. Definitely, it has done well. I guess when we think about -- maybe we'll go back to recession for a minute. The -- you mentioned the ability to kind of address your -- adjust your cost structure. Is this something that you're doing today to kind of get ahead of that? Or is what you're doing in response to COVID maybe positioning you to do that better as we enter a recession? It seems like everyone's kind of adjusting their labor force a little bit right now [indiscernible].

Well, it's been over a decade since we went through this. We've been able to invest and grow. And I go back and hate to harp on it, but our principle was to protect our employees, and that means protect them physically, providing a safe environment but also protecting them from an employment standpoint. And we're committed and Sam commented early on that we would not have any HCA employee be affected while we were going through this response phase, and we were able to stand behind that. We implemented pandemic pay programs to ensure that people who maybe got called off with less hours didn't lose their job and could continue to pay. We announced today internally we're extending our pandemic pay program through close to the end of June. So we're standing by that commitment first to our employees. Over 100,000 employees have participated in that program today. And we're hoping the volume returns and then we can bring people back to work and get back to some level of pre-pandemic trends going forward. But we are making adjustments, as we talked about earlier. Most of those are on kind of the discretionary spend levels. We are able to reduce some labor costs through contract labor and some premium pay. As we deal with our current volume trends, we can get some of our discretionary spend. We make sure that we drop our variable cost and our supplies and so forth commensurate with our volume, And then ultimately, again, as we talked about on the call, is we go into kind of a stage 2, which is how do we restart the volume trends that we're seeing in the most efficient manner that we have. And then, yes, we do have some Stage 3 cost plans that if we judged that sometime in the future we had a structural change we would prepare to address. Some of those are around just our support infrastructure and some of the fixed cost components to that. But we're not ready to pull those until we see how this volume settles out. So there are some discretionary spend, but clearly, our commitment to our labor force is still one of our guiding principles on here. And we're hoping that the volume returns and we can make the right cost adjustments to continue to serve all of our patient demands going forward.

All right. Perfect. That's all we have time for. Thanks, guys, for doing the call and looking forward to doing this in person in Vegas next year.

All right. Thanks, Kevin.

Thanks, everybody.

Thank you.