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

Good morning. Frank Morgan here. We're going to continue our fireside chats today with HCA. With us today, we're fortunate to have CFO, Bill Rutherford; and Mark Kimbrough from Investor Relations. Welcome, gentlemen.

Hey, Frank. How are you? And hello, everyone.

All is well here. Let's start out. I know first quarter earnings season is basically done now. And after a while, it was started sounding like Groundhog Day, where regardless of what subsector of health care it was, the first 2.5 months of the quarter were great and looked like they were on pace to maybe even be record earnings until COVID hit. So my thought is I want to make sure you would agree with that assessment. And then why do you think -- what was going on that was so good before we got to COVID? And what was happening in the pre-COVID era that was making the year get off to such a good start?

Well, thank you, Frank. And I think your assessment is right on. We were doing great, as we talked about on our call, up until about middle of March when it hit. And we were outperforming our internal expectations and off to what we believe was going to be another great 2020 and it was after a really strong 2019. And as we've talked about before, we turned the calendar with a lot of momentum. We felt a lot of the fundamentals and that I think will still eventually show themselves, gave us a lot of tailwind. That was the markets that we operated in were still very strong from an economic standpoint. We saw growing demand for health care continuing. Our capital investments that we had made over the years were coming online and providing a lot of growth. And then just our team's ability to execute on our strategy to -- from service line development to physician affiliation, we continued to be able to capture some market share. So we saw a lot of positive top line trends. And I think it was a fundamental -- a combination of all those fundamentals, good demographics, strong economy, good demand, capital investments paying off. Our focus on growing and developing high acuity services were -- and the same trends we saw in '19, we're continuing early in 2020, and then middle of March hit. And then almost overnight, us and along with probably most providers across the country, saw all that really dropped off the table as we saw different municipalities put a -- stop elective procedures and just as we saw the patient flow start to diminish because of people's concern going into a provider setting. And since then, we've really been focused on our response that carried us through middle of April, and we believe we're in the reboot process, just as we thought we would be, and we're starting to see volumes improve here week after week. And then ultimately, we'll have to determine where volumes settle out at.

Sure. I was going to ask you, you segued perfectly into that week, but I'm talking about being in the beginning, since the -- your earnings call, you've obviously -- you're in that reboot phase. And are you seeing -- anything you can update us on in your markets now? And has your visibility improved any in the last few weeks since we all talked in your earnings call?

Yes. And it has -- we started to give a little bit of that. We don't typically give intra-quarter information. We've been pretty consistent on that. But this quarter, not only in our earnings call, we talked about what we were seeing in the first 2 weeks of April, but we updated that since. And if you recall in our earnings call, we said inpatient admissions were about 30% -- down about 30% from prior year in the first couple of weeks of April. The last 2 weeks of April, they were down a little more than 20%. And really, with the first week of May, which is where we started to see a lot of our communities opened back up, we were down just under 15%, and we continue to see improvement in those statistics. Inpatient surgeries were down about 50% that we talked about in the call in the first couple of weeks of April. Last 2 weeks of April, we were down about 30%. First week of May, we were down about 20%, and we continue to see improvement from that point on as we go through May. Outpatient surgeries or hospital outpatient surgeries today are down about 20%, where, during the call, they were down about 50%. Our ASD case is at the low point. Because of the elective procedure stall, we're down almost 80% to 90%. Today, in the first week of May, we were down about 40%, and then we continue to see improvement in that statistic as well. So we think that will continue as we see more communities opening up. Many of ours opened up early May or the first week of May. Some were last week. Some were this week. So I think as we continue the quarter, we hope, as we talked about on the call, we see that reboot happening in the second half of the quarter. And ultimately, the question will be, once we get through this reboot recover probably the lost cases and procedures that had occurred during this period of time, where ultimately do volumes settle out at in a recovery period.

Right. Well, that was going to be my next question was -- and I guess before the next question, just to clarify on these percentages, just so that it's clear to the listeners, the -- is this the percentage decline relative to pre-COVID or is this year-over-year?

Relative to prior year.

Yes.

Relative to prior year. Okay. I just want to make sure everybody got that. And then, yes, to your point about the recovery, there are obviously a lot of other industries in the U.S. economy where missed demand opportunities aren't recaptured. And as you say, health care, the industry is certainly different in that demand can be deferred and later recaptured. But what percentage of that deferred demand that you think ultimately gets recaptured? And is there anything unique about your business that would make that better or worse than average?

Well, my answer is I don't know yet. We did a division -- all of our markets checked in last week to get some insight onto that, and I think that's what we're really gearing up with as to -- I think a substantial portion of that will be recaptured. I think it will likely take 30, 60, maybe even 90 days to recapture what we will. I don't think you recapture all of it because some of it was from the EV that I don't think necessarily has recaptured volume. But in terms if there were outpatient procedures scheduled and they were canceled, we're working with our affiliated physicians and have been really since the inception of COVID showing up about, one, making sure we had our internal capability in line that we had the appropriate laboratory testing, and we can test people, making sure we had the PPE, working with our surgeons in the schedule completion. And schedules are being filled out as we speak. I think there'll be some variation across the markets on there. And so I don't know an exact percentage, but I think the majority, we'll be able to recapture. But I think it will take 30, 60 days, maybe even longer to get that fully scheduled on there. And I think that's what we're seeing right now. We're recapturing a lot of those. What I think and what I hear, so those higher-acuity services that were deferred and that seems to make sense and have some logic to it that they probably had a little bit more urgency to them. I think the variable that will ultimately determine how much we recapture and how quick is patients' confidence of returning to a health care setting. We believe -- and all the reports we get is our physician community is ready to return, their clinics and their schedule and their clinics are beginning to fill up. And so ultimately, it becomes -- I think the variable is when do patients feel comfortable about returning into a health care setting and balancing that, I think that will be the ultimate variable. And we do have efforts underway to reach out, not only to our physicians, we think that those have been very productive, but reach out to our patients and the community at large of informing them that we can take care of their needs in a safe environment.

Got you. And you mentioned a return of those higher-acuity procedures. I was going to ask, is there a setting today that probably does make a consumer or a patient more comfortable in the hospital versus the ambulatory setting? So are you seeing -- is more of the higher-acuity stuff still happening on an ambulatory basis? Or do you think there -- or is it happening in the actual hospital as well?

Well, it's a little bit of both. Our hospital outpatient surgery is returning at a faster pace than our ASD, but it's still early. We're really only probably into the second week of some of these communities opening, and some are opening as we speak. So I think we'll need another period of time to fully assess that. But to your point, I do think and we're making the case at the ASD environment can be a relatively contained environment, not having an emergency room, and perhaps people will feel more comfortable in returning in that environment and moving into areas of the hospital. But even so, in our hospitals, we cohort patients that are suspected of COVID separately. So we're doing a lot of things. But I do think you're dealing with a little bit more of the community psyche and understanding of that. And perhaps the ASD does have the perception of being a little bit more of a safer place. And so as centers open up, as communities relax, there are elective procedures perhaps that does tend to accelerate here as we finish the quarter.

Got you. And when you look across your states, the big ones for you, Texas, Florida, Tennessee is a big one as well, are you seeing much variation in the recovery phase? Are they looking fairly similar across all these different states? Or is there any nuance we should pay attention to?

Well, it really is a function of when those states open up, and Texas was one of the early states opening up. Florida was opening up by region, so we are seeing some regions of Florida that are opening up. Tennessee, as you know, is opening up really this week for the most part. A couple of our western markets have yet to fully open up in California, so there are some geographic differences. But I think what is consistent is even in those geographies, we're seeing week-over-week improvement. But the states that opened up early, we're starting to see come back early. And then if you think about it, once the restrictions are lifted and maybe some of the community movement restrictions are lifted, it takes a little bit of time for the surgeon offices to fill out their schedule and then the subsequent procedure schedules to get filled out. So it's natural to think there's a week or 2 lag. So we're still very early into the reboot effort, I'll call it, and I think we'll really have a better assessment as we close the quarter. And we have 30 or 45 days underneath our belt on the reboot.

Got you. And maybe going from the revenue side to the costs side as it relates to the reboot, you've obviously had some furloughs in some cases. But how are you really managing the reboot on -- from the labor perspective? And I guess maybe even longer term, do you see any potential structural changes in the labor model as you look forward?

Yes. As we talked about on the call, one of our early principles was to protect our employees and caregivers by not only providing a safe environment but protect them from a job perspective. And so we haven't had any HCA employee be -- lose their job as a result of this pandemic because we committed to a pandemic pay program. We then furlough employees, which basically has the meaning of that you send them home with no pay, but they maintain benefits. We had a pandemic pay program for our employees. So our cost management efforts on the labor side were mostly all around the discretionary labor costs spend, which is around premium labor, reducing our contract labor, reducing over time, trying to give our employees as many shifts as they could get on that. And so a lot of our labor actions early on have been really getting -- eliminated as much as a premium pay, and our teams have done a really nice job in that front. As we begin the reboot process, our focus has been how do we build -- bring on the capacity in the most efficient manner as we can from a labor perspective and helping people return to work. So we have -- in all of our markets, these kind of opening up triggers, if you will, in terms of how do you bring on capacity efficiently, making sure that you've got the volume before you open up. So an example of that might be, if I'm in a surgery suite, and I have 6 or 7 ORs, rather than bring 6 ORs up at 50% capacity, we'll bring 4 ORs up and running at mid-75% to 80% capacity and trying to get the most efficient capacity, bringing up -- bringing that reboot process until we get back into a normal kind of cadence, if you will. And then -- and so our teams have done a really nice job given the circumstances on there, but we've also been able to staying behind our principle of our pandemic pay program and paying people, even if their shifts get called off because we don't have the volume. I think that is important, not only from our HCA cultural aspect, but to make sure that employees can weather through this pandemic on their own and be there for when we do have the business return for that. And then we have a lot of other cost management strategies, not only on the variable costs around supplies, but getting after the other discretionary aspects of our cost structure. We've spent -- and our teams have done a really nice job. We kind of identified those as our stage 1 cost efforts or stage 2 is really around the restart process efficiently as we can. And then we'll have to make some assessments longer term about where revenue settles out to see what our stage 3 responses might end up being.

Interesting. So I guess trying to wrap up -- mostly wrap up on COVID here. Assuming we were -- if we were to have a COVID 2.0 in the fall or winter, what have you really learned from the current crisis? And what would you do ahead of the next one if we get warning of that and be more prepared for that?

Yes. I think we -- and I'm very proud of the HCA response. We have teams doing heroic efforts from not only our frontline caregivers showing up every day, but from our supply chain, our laboratory testing. And so I think we responded as well as you could expect, and we are really proud of the team. I think if there is a resurgence of COVID, the system that's going to be better prepared from a variety of perspectives. First, we've got deeper laboratory capabilities. We do the industry as a whole, so really making sure that we got the laboratory testing capability and operational wherewithal is really a key linchpin on that. Two is, the supply chain is more secure. Ours is. We really managed through this as -- really well, and our supply chain teams really showed their strength and our warehousing capability. So between laboratory capabilities and supply chain, we're in a much better position. And then the three, I think something that may be different if a resurgence is, is just a lot of the ceasing and the orders to stop elective business was in an effort to make sure that the health systems won't overran and that we didn't consume it. And so is there a little bit more acceptance if we do start seeing some pockets that you don't need to shut down the entire kind of elective health care system in place because there's a little bit more confidence the systems can manage through that. We didn't necessarily see the surge in most of our markets that some anticipated early on. So I think those are different. If we see a resurgence of COVID in some period in the future than the first time, and I think we all will be better prepared to manage through that if that does occur.

Got you. CMS has been very helpful with financial support and some policy changes. Have you noticed anything notably helpful on the commercial side?

There have been. We're very pleased with our partnerships and our relationships with our payers. I think they have stepped up and done some things. UnitedHealthcare, in particular, announced accelerating some payments. They have all, United, Humana, the others, have reduced their pre-authorization denial activity. That was always a little bit of a friction point in there and to making sure that they didn't slow down the claim adjudication process. So I think on the margin, they have been helpful and supportive, and we're pleased with that. And we are also very appreciative of the government efforts in the CARES Act. I think all of those were very helpful for health systems to manage through, really, this significant business interruption that most health care providers had during the response phase. So I think all in all, I think they've been very productive in their discussion, and we're appreciative of those efforts.

A lot of the changes on the CMS side sort of have time limits on them. When you talk to managed care or some of the flexibility they're offering today, do they have similar time limits on?

I think they have said some time limits. I don't know how that will play out, but I would suspect that if we get into some level of normal cadence that we return back to things the way they were before. And again, I think our focus has been and has been even before pandemic to really advance our payer relationships to much more of a strategic dialogue versus just tactical that we're battling out contracts or battling out claim-by-claim adjudication. And I think we have made progress on that front with many of them. We have great relationships with United. We've strong relationships with Humana and others, so I think that will continue going on. But my sense is, yes, we get back into normal -- normal business routines will eventually find their way back.

Right. And I guess staying on that subject of CARES, obviously the grant money, some fairly significant numbers, I think, for the -- on the grant side, over $700 million, at least, is what you mentioned in the call. So I don't know if there's any other monies there. But there does seem to be sort of a mixed bag unfolding regarding people who are maybe reconsidering taking grant money. And I'm curious, when you look at it and you think about it, do you -- how do you assess any kind of risk that might be associated with taking that money? And would it affect your longer-term capital allocation strategy? I know you've always been a big buyer of your shares in certain times, but how should we think about that?

Well, I view -- if you think about the 2 aspects of the CARES Act, and really, the $700 million we talked about on the call is distributions from the Health Services fund, and then we have updated that subsequent to the call. When we filed our Q, we updated that to $900 million. Today, it's staying just over $1 billion with some subsequent distributions on there. But my view of that is that was principally to recognize the significant revenue disruption providers had during this response and the expense they had in preparing to serve COVID patients in their marketplace. So I view that much more of kind of business interruption insurance kind of effort, and it was a fraction of a percentage of the revenue disruption that I think systems had over time. There are ACA station procedures that happen that go along with that. We are in the middle of our ACA station. We feel confident that we've met all the criteria to be able to earn and keep those distributions there. We did not participate in any of the PPP programs and the loans. We didn't qualify nor even seek any of those funds. And then the second funding source was the accelerated Medicare payments that we got and we talked about on the call, but those have to be repaid. Those were more kind of cash flow recognition and no earnings on that. So the distribution of the CARES Act was principally in recognition of the significant, I think, impact -- business impact that occurred for health care providers as there were restrictions on elective procedures and the expenses that we had to prepare for serving COVID patients. And it only made up a percentage of the lost business that we have.

Got you. We're almost out of time here, but I guess I just kind of wanted to recap quickly some of the things I was jotting down as you spoke as we went through our Q&A. It sounds like you still think that a good percentage of this deferred volume you will actually recapture, that your high-acuity business seems to be coming back sooner. And one of the key variables here is patient confidence and then physician scheduling beyond that. But it looks like and sounds like you are seeing some improvement week-by-week from where we are today. And then on the labor management side, you've got these -- a plan in place to efficiently ramp back up with these labor triggers as volumes come back up and then sounds like you're going to be better prepared next time if we do have a COVID 2.0. I guess with that, I'll leave it to you for any final comments or thoughts. And then just maybe as you think about, do you see any other kind of long-term implications that come out of the COVID crisis? Obviously, a weaker economy might -- is going to be part of it, at least for a while. But any parting thoughts about your long-term view of the business and any changes that you may see in the long term?

Well, I think that's ultimately what we're trying to assess. I think as we get through these 2 phases, the response and the recovery phase, ultimately, where this demand settle out, what are some of the macro trends that we need to take as our inputs to address our strategic kind of plans. As we talked about early on, our thesis for HCA was really built on the growing demand for health care and the fact that we operate in these very fast-growing, robust markets, and we can distinguish the HCA network as the provider system of choice. I believe that those thesis will continue to show themselves. They may, from market by market, have some nuances. But we're going to have to assess once we get through this response and reboot phase, ultimately, how quickly does the marketplace recover, where do some of the economic trends fall out and what will be the correlating impact into health care demands. And we will have to respond accordingly. And I think HCA has had a long track record to respond to the environment that is presented to us, both positively. And if we see some short-term cycles on demand, and we can adjust our cost structure and our capital structure to be able to respond appropriately. So we're prepared to do that. But we think that the team has responded incredibly well. We are very proud of the HCA team, our caregivers, how we responded to this, and we're pleased we're beginning to see some opening back up across our marketplaces and prepared to be there to serve our community when needed.

Bill, Mark, thank you so much for your time, and that concludes our fireside chat. Thank you.

Thank you, Frank.