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

Good afternoon, everyone. Welcome to the Morgan Stanley Global Health Care Conference. And presenting this afternoon -- actually our fireside chat this afternoon, we've got Executive Vice President and Chief Financial Officer of HCA Healthcare, Bill Rutherford, on the line. And first, I have to read a little disclaimer before we get to some questions. So I'll read this disclaimer here. Please note that this webcast is from Morgan Stanley clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley research disclaimer website at www.morganstanley.com/researchdisclosures. If you have any further questions, please reach out to your Morgan Stanley sales representative. And with that, Bill, I'd like to go ahead and kick off a few questions here.

Okay. All right. Let's do it. Good afternoon. Hello, everyone.

Great. Obviously, we're near the end of Q3, and I'm sure the question that's on everyone's lips is what are you seeing in terms of volumes. Obviously, you commented in Q2 that it looked like Q3 and July was off to a decent start. But in terms of inpatient surgical ER, any trends you can give us? Anything you can comment on?

Yes. My comments for the quarter will have to be general, not really giving any intracompany -- intra-quarter specifics on here. I'll tell you if we take a broader look, obviously as we went through the second quarter, we saw the most significant impact on our volumes in the month of April. And as we talked about then, we expected a reboot and recovery process to start in the latter half of the quarter, which we saw. We saw volumes recover in May and June. And as we talked about, by the end of the quarter, we were close to -- we weren't quite at pre-pandemic levels but we were close, except with the emergency room volumes. We're still lagging behind, say, 15% to 20% on there. And so we believe that recovery would continue into the third quarter. And we talked about July was busy for us. And so we were continuing to see positive volume trends in the month of July. But we've also talked about, and I think as most people know, we then saw a resurgence of COVID cases in July and actually a lot more cases than we saw during the month of April. And as a result of that, we took some voluntary steps to suspend the elective procedures to ensure we have the staff and the PPE and the physical capacity to serve those COVID patients. And we also want to demonstrate to local municipalities and government agencies that we could manage through these peaks and valleys of volumes and they didn't necessarily have to issue governmental orders or shut down elective procedures. And so July started off strong and then we had really a COVID surge and then it was compounded by -- we had a temporary reduction of suspension of elective procedures. Those were in select markets that we're seeing. It wasn't across the marketplace. We still had our ASDs operational during that period of time. So we didn't have the effect that we did in April. In April, we saw the shutdown of elective procedures but we didn't see the COVID. In July, we saw a selective suspension of elective procedures and we saw the COVID. And that has since subsided. So we really haven't had a normal period for us. But I'd tell you absent that, I think the general trend line that we saw in the end of the second quarter, like, is continuing. And we'll try to give you specifics when we release the third quarter. I think we're still trying to get a read on where does demand and the volume indicators eventually settle out at. I think the volume is one indicator. We have also talked about the patients that we have seen and what we saw in the last half of the second quarter and even in July, were a higher acuity patient and a higher intensity that brought more revenue with them. And then just as we saw in the last half of the second quarter, we were seeing a favorable mix that our Medicare volume was a little slower return than our commercial volume. So even though maybe some of the volume indicators as a whole were down compared to prior year, we were seeing some higher acuity and favorable mix that would hopefully help offset some of that pressure on that.

Got you. Staying with the COVID theme, I mean HCA received, if memory serves me correctly, approximately $1.7 billion in CARES Act dollars and over $4 billion in Medicare advances. What's the status? Obviously, there's a debate going on in Congress about another stimulus package here, which might include some CARES Act dollars. But what's the status of repaying those advances? And what's your view or at least what's the company's view on potential more CARES Act dollars coming to the industry?

Yes. So let's talk about the advances first. We have received a little over $4 billion, as you mentioned. And as you and I think many know, that was originally scheduled to begin to be repaid in August, and that would be repaid through offsetting current Medicare claims. And there, you would take a period of time between August and April and repay those accelerated funds. And then any MAUs that had yet to be repaid, you'd either repay them at the end of April or you carry it with an interest rate. Those offsets, if you will, have not yet begun for us. We didn't -- we haven't seen those in August. And as we understand it, there is some consideration being given by policymakers to look at should they adjust any of those terms that were originally laid out. I don't know and I don't think there's any specific finalization of that, but I know it's under evaluation. So I don't know, sitting here today, what those will be and what the repayment schedule will ultimately turn out to be. But we're fully anticipating having to repay those. Whether we start sometime soon by offsetting or whether it gets adjusted in some manner by Congress or policymakers in Washington, we'll have to see. And I'm sure that will be very public when that does get adjusted, but we haven't seen that offset yet. Relative to the $1.7 billion funds that we have received, we have received both general distribution funds and targeted funds that -- they gave funds based on specific usage, whether it be hotspot funding. There were some rural hospital fundings. There were some safety net funding that occurred. And we were the recipient of a variety of those funds. As -- you probably also know that every facility has to go through what I'll label as a technical analysis, and you have 90 days to go through basically an attestation period that you've accepted those monies, where you compare what you think your business that's been disrupted or expenses that you've expended relative to serving COVID, compare it to the CARES Act and you assess whether you are in receipt of those funds. So from HCA's perspective, we are still in the middle of our analysis of each one of those fund -- or at least the targeted fund monies that we received. And we will conclude our assessment of that within the third quarter and have future discussion on how we're thinking about what those funds are that -- and how we're going to treat those. But we're still in the middle of going through our analysis of both the funds. So the advances are going to be repaid at some schedule to be determined in the future, and we're still in the evaluation of our distribution funds.

Got you. So obviously, the company has built up some liquidity. But obviously, given the COVID environment, how does HCA think about the use of capital, CapEx going forward, share repurchase? How do you think about the uses of capital? And I know it's still a somewhat uncertain environment because of COVID, but what -- sort of philosophically, how do you think about CapEx and liquidity going forward?

Well, it's a great question. And I'll tell you, as you know and I think many know, we have a long track record, I think, of having a balanced and disciplined approach to capital allocation. And I think from a long-term view, our philosophy regarding capital allocation hasn't changed as a result of this pandemic. And that philosophy is to make sure that we provide adequate capital for internal investment to provide growth to ensure that we've got the balance sheet capacity to execute on acquisition opportunities as they present themselves and ensure we have an appropriate capital allocation of returning value to shareholders either through a share repurchase program or a dividend. And we've got a long track record of shareholder return capital strategies. Clearly, as we face this pandemic, it was prudent for the company to take some -- make some management decisions to preserve capital until we had a good understanding of what the ultimate impact would be and how the business would settle. So we took what we think, maybe in an abundance of caution, some very prudent management actions. We entered into a $2 billion credit facility. We lowered our capital spending from probably $4.2 billion to where we think it's going to be, $3 billion. We did spend the share repurchase. And as you know, we suspended the dividend. And we view those hopefully as temporary actions, and there'll be a period in the future where we'll evaluate resuming those. But our philosophy, I think, remains same. We have to get a read on the pandemic and its impact and how ultimately the demand curve will present itself, but our philosophy of having capital to invest into the business through capital and growth, our philosophy in maintaining the balance sheet with the flexibility to execute on M&As and have an appropriate return of value to shareholders through a share repurchase or a dividend is still going to be part of our long-term thinking. We'll just have to wait to see when is the right time to think about resumption of those as we go forward over the next intermediate period of time.

Got you. So a question obviously that sort of appears is given that the industry dynamic and what's happening -- and clearly, a number of hospitals and hospital systems, they have suffered, particularly in the not-for-profit sector, are you starting to see potential M&A activity bubble up a little bit? Are you starting to see opportunities that maybe you wouldn't have seen pre-COVID? What -- you had mentioned acquisitions and use of capital. And obviously, those deals tend to be pretty accretive. What are you starting to see? Or are you seeing...

Yes. I'll tell you we have not seen it yet. We anticipate we will see some. I think any time in our history when the industry goes through some disruption, it creates some opportunities for M&A. And I think that will very well be the case here. I think early on, what we're -- if we are seeing it and where we are seeing it, it would be in the outpatient areas. When you think about maybe some of those outpatient providers that may have not had the financial density or durability to survive these cycles, most likely, it's where we're going to be seeing some opportunities early on. It may be in the ASD arena, maybe in the urgent care. Those will be generally regional opportunities that present themselves. I think hospital M&A, at least now, has been a little dormant just as everybody has been trying to internalize their response to the pandemic. But I do think there's a reasonable chance that this will begin initiating discussions over the next period of time. And where that falls out, we don't know. I think HCA will continue to be thoughtful and strategic about where its M&A hospital acquisition should be. And we want to make sure we read on some of the macros before we go forward, but it very well may present itself with the opportunity to enter into some new discussions with potential M&A partners and strategies. I'll tell you as a broader view as we think about moving to growth strategies, I think we and many of the health systems have been really focused on our response, making sure that we can be there for our patients in this period of time. And I think it's fair to say we've been very internally focused to be able to manage the organization through this response. And as we approach '21 -- I know Sam has challenged us and we continue to have as part of our strategic -- where are the new growth opportunities that may present themselves for HCA? M&A may be one of those. We may be looking at are there new service lines or adjacency services that we could look into moving to that heretofore we weren't moving very fast. That may be skilled nursing. That may be looking at opportunities to move into more home care types of services. That may be looking at telehealth and utilizing what we've learned through the pandemic to accelerate some of our telehealth offerings as potentially new revenue and new growth opportunities. And then the next area is how do we get back to capital deployment and program development and potentially looking -- are there opportunities for market share gains during this period of time if HCA is able to maybe maneuver and recover a little bit quicker than maybe some of our competitors should be. So as we think about dimensions of growth for us, M&A could be a dimension of growth, potentially evaluating, are there some new adjacencies we can move into? And then when do we go back to what we have been doing for a long time, program development, capital development to help facilitate market share gains and growth? So that's what we'll be incorporating as we think about our '21 budget and planning. And as we talk about the future, we'll be sharing more details of what our thoughts are on each one of those areas.

Great. So I'm going to ask you to go forward here a few months. And presidential election, I guess, is just 47, 48 days, some away, something like that. So let's sort of presume or let's sort of say if Joe Biden is elected -- and obviously, he's talked a lot about different proposals, but it seems to be sort of centering around a Medicare for all, a public option for Medicare, allowing a lot of different people to enter the Medicare program, even at one point mentioned maybe lowering the eligibility age, things like that. Overall, I mean when HCA thinks about that, do you view it positive, neutral, negative? How do you think about that?

Well, there's a scorecard that I think -- then we'll have to wait to see how details play out. Potentially on one side of the plus of the scorecard with a Biden presidency and administration, there may be more willingness to work with the existing Affordable Care Act structures, more -- put more structural foundation in the health marketplaces and the exchanges, potentially finding ways to help more states expand Medicaid. So I see there's a plus side potentially of working within the existing Affordable Care Act and strengthening that to help more people gain access to affordable health care. And I think I would, in my eyes, put those on the positive side of the ledger. If they're reducing the age of Medicare and allowing people 60 or 55 to buy into Medicare, and that's a shift from people who have commercial insurance coverage going on in the Medicare, depending on how the details of that work out, there's no question really that's a negative for us. That's the takeaway. To me, I don't know what problem that solves. It shifts more liability into the governmental roles. You're going to have to find a way to fund it. You may have to further adjust tax policy. You may have to think about how do you adjust benefits to existing Medicare. And so if the pursuit is coverage, I don't know if that advances the coverage question as much as working with the Affordable Care Act but -- so -- but if at the end of the day, they're lowering the age and people who are now enrolled in commercial coverage moving to Medicare, we're going to be reimbursed lower amount, and we will have to think about how do we adjust and is there enough on the plus side of the ledger to offset the negative side. And so that's really where details matter, where pacing matters. I think we've seen in the past any major health policy legislation is complicated and takes some time to effect. And so we'll just have to wait to see how that plays out. But today, that's the simple way I think about it. The pluses is working within the existing affordable care. But the negative, if there are some constituencies trying to satisfy the lower Medicare and shift more people on the Medicare and take more debt on the federal government, that's going to -- that would be a takeaway for us that we'll have to just net-net figure out and decide and determine where do we adjust accordingly.

I'd just remind any of our listeners who are part of the virtual conference, if you have any questions, please go ahead and submit them. I'm going to have a few more questions here. So Bill, post-COVID environment -- I guess this would go under lessons learned. In terms of managing the business, are there things you've learned here over the last 6 months -- the company has learned that are permanently going to change how you manage the business? And just give us an example or 2, maybe some things that -- how you might be managing the business differently going forward in a post-COVID environment?

Yes. I think any time you go through an experience like this, we've learned. And we've learned, the organization, just as we've learned when we've gone through natural disaster or hurricanes and we've learned to do enterprise command really, really well. And we've done enterprise command when we've had hurricanes in Houston or Florida. They've always been regional. This is really the first event where we had enterprise command across the entire enterprise. And so we were fortunate that we had a lot of systems and processes in places that we could rely on to help our facilities respond. And really, the scale, the resiliency, the unique characteristics of HCA really showed itself during this time, and we're very proud of the team. There are a few lessons we've learned and a few experiences we've gained from that I think enforce the power of the organization that when we rally under a common cause and really have a select set of very focused strategic objectives to accomplish, we can accomplish those. And telehealth is an example of one of those. We have been messing around with telehealth for a while. It was under a pretty slow pace. It was 1 of probably 100 initiatives we had. It was being resourced sporadically. We were probably doing 400 to 500 telehealth visits a day. And all of a sudden, the pandemic hit. We knew we had to bring a cross-functional resource together. And literally in an amount of 72 hours, we put the technology. We put the process controls. We put the linkages to our patients and community. And we were going from 400 to 500 visits a day to 12,000 visits a day. And so it showed us when we can really muster the energy and the resources under a select, common cause, we can get things done very quickly. And one of the things Sam continued to challenge was how do we use this to accelerate learnings. And that's an example. And we're now saying what are those select, really high-value strategic initiatives that we can focus resources from across different areas of the company to execute on. One of those is our digital interactions with our patients. We had been on a journey doing at slow pace. We just reorganized and brought a bunch of different resources from our websites to our scheduling, to our physician outlet. And now we're utilizing the experience of telehealth to say how do we accelerate enhancing the digital journey for our patients. Another example is navigation. It's something that health systems struggle with a lot. It's just helping our patients navigate the health system as you go from your primary care provider to a specialist to hospital post-acute so that we keep patients within the system and we provide a high degree of service. And we were marching along an initiative, but now we're thinking that that's a high-priority initiative and how do we really get organized and accelerate execution in that. So I'd tell you, in a long-winded answer, some of those are really key lessons learned. We've learned through this experience and others the importance of communicating effectively, setting out guiding principles as we went through this, which we did, and Sam alluded to on the call, committing to our employees. And these times really, I think, bond our culture together and have become really opportunities to strengthen HCA even though we were extremely strong going into this. So it's been humbling to watch, and we're proud of the team of how they've responded. But at the same token, we tell our internal team we still have challenges in front of us. We're going to have COVID surges. There's still a lot of unknowns about what the ultimate economic impact is to the country, what coverage is going to be. And we're going to have to continue to be prepared to respond to the environment as it presents itself. But I'm confident HCA is ready to respond as necessary.

Bill, one of the questions investors ask, particularly now in this environment, is leverage level. And then sort of on a debt-to-EBITDA or net debt to EBITDA basis, how do you think about leverage? I know philosophically, the company has sort of always been comfortable on that sort of low investment grade, a high non-investment grade area. How do you think about leverage right now and going forward?

Well, again, I think going back to the actions we took, we're in a great position. Our leverage ratio, I think, was 2.77 at the end of the quarter, where historically, as you know, our range is 3.5 to 4.5, and we've been hovering on the low end of that range for quite some time. To me, it gives the company and has historically given the company a lot of flexibility to operate and maneuver. I don't think we're yet ready to call a change in our leverage philosophy or targets yet, but it's something we'll continue to evaluate. As we think -- as we get a read and try to get a little more data points on what ultimately happens with health care demand, where are the growth opportunities, what are the policy changes, if the election generates discussion around policy changes, how should we position the balance sheet. So I think today, it still is reasonable for us to maintain a conservative posture relative to leverage and relative to capital allocation. And I think that's how I would describe our position today. It's maintaining a conservative posture, so until we see how long this pandemic lasts, when a vaccine is ready, what the ultimate impact on the overall economy and coverage and -- so that we can give the company as much maneuverability and headroom to react. If we see growth opportunities and one of those M&As materializes, we have the ability to execute. Or if we see policy changes that we think provide us some risk in the future, then we -- it's going to be -- we're going to be benefited by having a conservative view on that. So dancing around your question, we're not changing our leverage target yet, but I think we're going to stay well below the low end of that for the time being and then make the determination at the right time as where should that settle out at. Access to capital remains strong for the company. Our cost of capital remains strong. And so we're, I think, in a good position relative to the balance sheet.