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

And why don't we shift over to kind of expense management and some margin question for a few minutes? And we were, of course, certainly surprised with how -- just how resilient the business was and your ability to adjust the cost structure. Can you just talk about the approach you all took to discretionary and nondiscretionary costs and kind of help us think kind of what was sustainable going forward versus what was just a temporary accident you had to take, given the environment?

Well, it's a great question and we're very proud of the teams and their efforts on that, especially in light of our commitment during the pandemic that no HCA employee would lose their job, and we've been able to maintain that commitment. So the cost adjustments we made were around the edges, if you will. We -- I would tell you that falls in probably 3 broad categories. And the first one is maybe the quickest and easiest to get, where we spend all "discretionary spending," whether that'd be marketing, we try to defer repairs and maintenance, look at certain contract services, some things that were more management discretionary that we had the ability to defer without really material impact downstream. And so that was the first thing that we were able to achieve. And our teams did a really nice job. And that showed up in the other operating expense line for the most part. The second category is obviously flexing down the variable costs that we have, mainly around the supply utilization. So our supply cost trends were very solid, given the volume drops that we had. So we were able to adjust them. And then in the labor environment, again not laying off any HCA employee, what we had to do on the labor side is eliminate as much as that contract labor, premium labor, overtime labor and use of contractors out of the system. And so we were able, and our teams did a great job, of very quickly being able to shrink the non-employed labor components that we tend to utilize, especially when we're servicing volume. So we shrunk our overtime. We terminated contract labor that we had in the system. We have various ways that we staff for volume and premium labors. And we were able to really flex down very quickly on them. And I would tell you, those 3 areas were -- what I say were more in our immediate response when we saw the pandemic hit and the volume dropped. And then as we've talked about on the call, we quickly undertook what we call inside a financial resiliency effort, where more longer-term cost adjustments that we're making. And some of those will take some time to burn through the organization and realized. But there are things that -- we're using this experience to take the opportunity to maybe reduce some variation and some costs that we have across the enterprise, looking at our support cost structure that we have, trying to see where some of these discretionary spends can be more permanent in nature in there. So we are in the middle of what I would call to our Phase 2 resiliency efforts so that we can make and continue more long-term structural cost changes on there to respond to the fact that we might be in a lower demand environment going forward than we were pre this pandemic. And so we were able to achieve these immediate response through discretionary spend, drop in our variable costs, working around the premium labor. And then we continue to have other cost adjustments we're making. And some of those would be standardized staffing grids across our facilities, looking at our various support structures that we can get more consistency in, looking at some of the projects that we had or initiatives that were underway that today, we may no longer make sense to fund and prioritize on a different set of initiatives. So all of those are underway. And again, I'm confident, and I think we have a pretty long track record that HCA, the organization, is able to respond to what the volume and the revenue dynamics present themselves. And so we're pleased with that. And then you get a little bit of benefit, like we did in the second quarter, to your point, on our margins, where the acuity was higher and the payer mix was better. So when you couple the higher acuity, which brings a higher revenue per unit, we had a better payer mix in there in terms of -- as the Medicare volume dropped, that was a little greater than our commercial volume decline. And then you couple on the cost actions that we took, all of those really resulted in pretty strong margins for us. And we're pleased with it. And we outperformed our expectations as we went into them.

And as we're -- I guess I was going to ask about kind of margins, which -- it sounds like the cost approach is obviously very comprehensive and some of that was evident in the second quarter. But some of this is -- there's still some more to go. As we think about the second quarter margin performance, it was obviously pretty, pretty strong and when you exclude CARES Act, and especially if you think about your EBITDA probably being weighted more in the back half of the quarter. But as we get beyond this initial COVID impact and we think about all these actions you just outlined, are you in a place where even if we're in a volume environment that's a little bit below pre-COVID, is it -- are all these actions add up to a place where HCA could still be generating a margin about where you were pre-COVID? Or are these actions, would they be above and beyond that? Just kind of help us think through that anyway.

Well, it's a great question. And our internal expectations are definitely to maintain our margins where we were pre-COVID. And then the question is can we maintain our current margins on there? And as you expect, there's going to be puts and takes that we need a little more time to see how things settle out. Clearly, the early cost adjustments served us well. But some of those are temporal, some of those will be able to be permanent. And then we need to let these other cost actions that we take execute over the course of the balance of the year that should offset that. July surge in COVID could continue to put a little bit pressure because we had to bring in premium labor to serve that. So there's going to be puts and takes on the margin. To me, I think I'm very comfortable with where the company will fall out on this cost. But the margin determinant will be the acuity and the mix factors of how that settles out. The COVID patients are a higher acuity medical patient than we typically see. And the payer mix is still probably favorable compared to historical trend because it's the Medicare segment is the segment that likely will take a little bit longer to return. So we have a higher commercial mix than Medicare. And so those are really going to be, I think, the longer-term determinants of where margins settle out. The controllable side, we can manage through. But we still don't know how acuity and mix will settle in once we get to some normal level, if we see that even in the near term. And I really think we need a few more months and maybe quarter to assess that. And we're in the middle of trying to draw some conclusions on that as we think about planning for '21. And so that we don't want to operate on kind of false positive signals. And we're getting a lot of positive signals because of both the acuity and mix. And we're going to have to make some assumptions of what that settles out at. I think September and October will likely give us good reads of where it is. June was a good month. July had this volume surge, but it was really COVID. August is settling. And we really need September and October of kind of maybe a normalized month, if you will, to really assess where are those both the acuity and the mix that allowed that. And so as we conclude the quarter and get into that, we'll share with you what our thinking is at the time. But we're in the middle of trying to assess that ourselves as we think about '21 planning. But right now, all of those factors have yielded a strong margin for us. The good mix, the higher acuity and the cost adjustments. And internally, our goal is to hold as much of those elements as we can as we go forward into the early part of '21.

Okay. Let me try to kind of broaden the aperture on COVID. And we had talked about a lot of the sort of near-term dynamics. But what are some of the longer-term things that you're focused on? Obviously, telehealth gets a lot of attention with investors. I could kind of foresee an M&A opportunity for someone like HCA, but just what are the things you're focused on kind of longer term as a result of this pandemic?

Well, I think there's 2 or 3 elements to this. The first one, on the COVID itself, we believe we're going to, over a period of time until a vaccine is widely available in the marketplace, we're going to go through cycles of COVID patient-surgeon and not surgeon [indiscernible]. And so how do we make sure we're prepared to manage through those ups and downs and whether it'd be cohorting the patients, whether it'd be making sure that we've got adequate PPE, make sure we got the laboratory capabilities. And so our ability to manage that COVID cohort is going to just continue to be able to manage through that because we expect there'll be cycles. Is there going to be a fall cycle, there'll be an early cycle, so managing through that. We do know through this pandemic, we have some learnings. And to me, it really showed the power of HCA and the power of our scale, where -- and telehealth, you called out is a great example of that, where we have some telehealth initiatives, but we're gaining moderate traction throughout the field. All of a sudden, and literally in about a 72-hour period, we were able to focus a significant amount of the company's resources on enhancing our telehealth capabilities. And we literally went from 400 to 500 telehealth visits a day to close to 10,000 to 12,000 telehealth visits a day. And so we've asked ourselves, how do we harness some of those learnings? Where are those next generation of high-impact activities that we can rally all the efforts of the company to bring to the table. I think one of those will be around digital outreach to our patients in terms of how do we interact with the patients. I think one of those will be more around how we help patients navigate the health system as they evolve from -- move from a primary care visit to a specialty visit to an outpatient procedure to an inpatient. We have been working on various label navigation efforts and helping our patients. Well, now we think there's opportunities to accelerate those things. So I think there are a lot of operational learnings and initiatives that we can take from this pandemic that I think will benefit us in the future. And then ultimately, when you think about the marketplace, oftentimes historically, when we've seen the health care market go through a disruption like this pandemic, it does create opportunities potentially for M&A. Because you may have other settings that don't have the wherewithal to sustain through there and they want to partner with that. We'll see where that plays out. I think it's still too early to judge how that shows in the marketplace. Sam continues to challenge us to -- in his words and he's used this several times probably, move into the fast lane. How do we get into growth mode and use HCA's unique capability, our scale, our operational capability, our capital resources to look for accelerants for growth during this period of time? So that is clearly part of our strategic thinking right now. And it may be from new capital investments, it may be from M&A. It may be from -- are there new service areas that we should evolve into? So again, too early to call any of that. But when I take these 3 dimensions of making sure that we have the ability to serve a COVID patient that will be with us for some period of time now, making sure that we can harness the organizational capabilities to capitalize on new initiatives and then looking for new growth opportunities, all of that is part of our planning kind of horizon as we go into '21.

Okay. And maybe just asking generally about growth, I think HCA is well-known for this 4% to 6% EBITDA growth target. And you were going through a period where you've been sort of nicely above that prior to COVID. So maybe just take a step back, kind of what was driving that really strong performance? And this isn't a setting where you change guidance, but just kind of -- and whatever perspective you can share with respect to what to look [indiscernible].

Yes. If you look historically, we have really been outperforming that. And we're on probably a 7-year, if not longer, really growth trajectory for the company. And when I step back, and even during the time we talked about it, at least 3 macro dynamics facing that. Number one, the marketplace was extremely strong. The markets that we operate, the economic indicators, the demographic growth in a lot of our markets were far exceeding national averages. And you know that, whether that'd be Dallas, Texas or Denver or Austin, Miami or Tampa, we were just in really fast-growing, dynamic, economically strong markets. And we have significant presence in those markets. So that was able to facilitate growth. And then the second element was our strategic approach to the market was yielding market share gains. And as we invested in developing a broad network of services and in deepening our clinical capabilities, we were able to achieve over a period of time, on average, probably 20 basis points of share gains, even on top of the organic growth that was in these markets. And so we were in a period of really strong top line expansion. And then at least depending on how far back you go, you obviously had the Affordable Care Act and improved access to health coverage supporting all of those. And then our teams just continued to manage the operating cost side pretty well. And then we were investing capital at record levels because we saw opportunities to put capital to work to meet this growing demand for health care. And so all of those ingredients had been at play literally 7 years, if not longer, and we were really enjoying it. And as we turn the calendar, as you know, we believe that momentum was continuing into '20. And indeed, it was the first couple of months. So as we look forward, and you mentioned our long term, the question is ultimately out there is where does demand for health care settle out in this intermediate term for the next few years? We still think long term, there's growing demand for health care in this country, just for a variety of reasons. And we continue to believe HCA is in great markets that have fast-growing fundamentals. But in this intermediate run, the questions will be what happens with demand? Does this pandemic affect demand in any way? And is it -- what happens with the demand for the higher acuity versus the lower acuity? And maybe what we're seeing is the lower acuity health care sets, say, our ER visits, that isn't going to be that big of an economic loss if we can maintain the demand for the higher acuity. So that's a question that's out there that we're going to have to just again have a little more data points, a little more time to assess demand. And then payer mix would be the secondary question on there is how does payer mix settle out? And what ultimately is the economic impact in the country? And how does that affect people's coverage? And then obviously, we have election in front of us. So there's a lot of dynamics that are going to be in this intermediate run. We don't believe it changes the thesis, the long-term thesis that growing demand for health care making sure we have broad network and deep service capabilities, and we invest for growth. But in this intermediate run, we're going to need some time to see how those settle out. And right now, there's just still some unknowns. But what we do know is we're prepared to respond to whatever the environment is presenting to us.

Okay. Bill and Mark, we've got less than 1 minute left. I think it would be unfair for me to try to squeeze 1 more in and force you to get it in under 1 minute. So I think this is a great place to leave it. We really appreciate you spending the day with us and providing your perspective. So thank you, and thanks to the group for joining in.

All right. Thank you, everyone. Matt, thank you.

Thanks, guys.