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

I can't say discernible. Actually, our ASC cases are down more than our hospital-based outpatient cases. And I think that's largely because of some of the lower acuity GI and endo procedures in the ASCs are being put off and deferred, and we'll have to see whether they return. I think the area where it has most implication is -- continues to be in the orthopedic area. And whether -- that was a trend that was occurring pre-pandemic. And I think it's a trend that will continue post-pandemic. It may have stepped up a little bit, but I don't think it's been material for us on there. But I do think evaluating the appropriate setting of care, having the physician's comfort of operating in an outpatient setting will continue to be there. But we'll just have to see. I don't think, really, that we've seen this major shift yet on there, outside of just maybe some trends that were already underway. It may have accelerated a hair there, but nothing I think that is just -- you're seeing this big old shift from an inpatient to an outpatient at any one time. So -- and all of our settings were down relatively close to about the same percentage points. So I think that's just, overall, a little bit of compression of the demand for services, and whether it's consumer behavior putting off or whether they're finding alternative cares, whether it be our inpatient settings or hospital outpatient or an ASC, they're all staying relatively close in terms of the declines that we're seeing there.

Right. Another area that's gotten a lot of play in the pandemic is the whole idea of virtual care and telemedicine. What is HCA doing there? And have you stepped up your involvement with that and through your physicians and so forth?

Yes. Absolutely, we have. And obviously, it played a hugely important role in the first phase of the pandemic, and we've talked about that before. That was really an area of learning that we've identified in terms of how we can accelerate and bring all the resources of HCA to bring new services or products to market. Pre-pandemic, we're -- we had a telehealth initiative, but it was kind of just going on its own pace. We're maybe doing 500 telehealth visits a day across the network. All of a sudden, in about 72 hours, we were doing 10,000 telehealth visits a day and even north of that. And recently, as we think about telehealth, there's really 3 dimensions of telehealth that we're seeing, we're funding and we're investing in. There is the physician to patient telehealth, I'd say it's within your primary care clinic or your urgent care and you want to televisit. And so that is going to continue to be with us for a while. I don't know what percentage of the visits it will ultimately be. We know in the early stages, it was maybe 20%, 30%. It may settle down into high teens, I don't know. But that's an important part, and we have the capability and now it is an expectation that you have that one. But we're seeing patients comfortable returning to the clinic. So it's not as high as it was in the peak of the pandemic. The second stage of telehealth is our provider to provider outreach. It may be what we've had in place for a while from a tertiary facility, providing neuro consults to a non-urban facility or behavioral health consults or other services on there. And we see that as a growing demand. We've got probably 400 to 500 sites that are doing that provider-provider. And then really, I think, a new area of telehealth that we did experience in the COVID area is inside the walls of the hospital. It may be our hospitalists interfacing with patients in the hospital bed, it may be our intensivists or remote intensivists, telehealth visits into ICU patients. So we really think those 3 dimensions create a growth opportunity for us going forward.

A big part of the HCA story this year has been the cost reduction and cost structure -- cost restructuring, I guess. Can you comment a little bit on what you did? I know the company acted quickly in the face of the pandemic. And maybe delineate, what have you done sort of temporary and what have you done that may be more sustainable? And...

Yes, we put that under kind of our financial resiliency umbrella term. And as we -- we have really our phase 1 efforts, and those were our immediate actions. And we did everything we could to drop the cost structure of the company very quickly. Those are mostly around our discretionary cost areas and some of our variable costs because, as you know, we committed not to have any HCA employee lose their job during this pandemic. So we're committed to kind of full staffing on that. We had some pandemic pay program. So our early steps were cutting back marketing, cutting back travel, cutting back repairs, some contract services, making sure we dropped our variable cost structure when the volume declined, and we dropped a lot of our premium labor areas. We tried to manage overtime down. We eliminated contract labor as much as we could. We shrunk some of our PRN pool. So all of those immediate variable costs were part of our phase 1 that we executed late March, early April, and we started to see the benefit of that in May and June. And it was really part of the recovery that we have. And then we moved into our phase 2 efforts that were still underway. And some of those have already been implemented, some of those are to be implemented. Those are maybe more of those areas where we're looking at are there redundant efforts that we have across the organization we can eliminate, how do we think about field support levels. We've talked about on our call, are there other areas that are prime for a shared service kind of structure? Laboratory, we learned through this, is an area. We've, pre-pandemic, operated really decentralized lab versus other areas we've consolidated, whether it be supply chain, revenue cycle, HR or IT support. Even pharmacy, we've consolidated a lot of our pharmacy operations. So we've identified a new opportunity for us as a lab shared service environment where we can bring the scale of HCA and lab. And I think that has an efficiency play as well as allow us to make sure that we've got the lab capabilities and turnaround time in play. We've talked about telehealth as an opportunity. We've talked about some redundancy around field support. We're still are organized around geographic support structures, and we support those with common elements. And we're looking at can we move those up a little bit. So we really are in the middle of our phase 2 resiliency that we think will continue to occur throughout '21. We think some of those phase 2 resilient may help offset if we do begin to see some pressures or cost come back into the system, either because of the labor trends that we talked about earlier or some of these discretionary efforts that we held. Eventually, we're going to have to turn back on at maybe a reduced level, but at some pace we can use these new efforts to try to counterbalance that. But I think what we've learned through here, we're confident in the organization's ability to kind of respond from a cost structure to the environment that we see. And I think that has been proven out here over the past several months, of course.

Interesting. I remember you highlighted the lab work on the call is a new initiative. I think a few years ago, you were working on a pilot in Denver with one of the large lab guys, and then you were also working on your own thing in Florida. Have you landed on the Florida model? Is that what I'm [ missing ]?

Yes. I think that's fair. We have had a consolidated lab in our South Florida market for some time, we call it IRL, Integrated Regional Labs. Over the past couple of years, we've taken it to across the state of Florida. And now we're taking that same capability into markets. And we actually have a rollout plan market by market. The other one you mentioned was really this idea of can you combine outpatient reference lab infrastructure with inpatient hospital lab and bring those together for efficiencies. And we've tried that from time to time in market with moderate success. But we think the better model for us right now seems to be utilizing our traditional shared service, bringing scale, bringing consolidation, bringing best practices and standardization within the HCA side and not necessarily move after kind of that outpatient reference lab activity right now.

Right. No, that makes sense. One of the areas -- I mean, as significant for you, maybe more so than I would have thought for a more urban-oriented hospital operator, is labor and delivery. That's been always a good business line for you. There's been a lot of discussion about the volatility in the labor market. I think Florida published that their births were down 10% in the summer in 1 month, August, which seemed way off the chart. Do you have any thoughts on what you're seeing with respect to that trend? And...

No, we're speculating like everybody else that come November, December, might we see a spike in births as everybody was quarantined early on, I don't know. We are seeing some softness in our deliveries. It hasn't necessarily affected our neonatal intensive care unit volume though. We're seeing reasonable trends in that area on there. Sometimes there's a correlation. So we are seeing a couple of points decline in just deliveries. We're not seeing that 10%. But what we are using and trying to utilize as a precursor, new appointments into our employed OB/GYN practices. New patients can give us a reasonable insight to kind of the pipeline, if you will, that may occur. And as I said before, and it holds true for OB/GYN, we are seeing the schedule of new patients in OB/GYN practices begin to return to what our historical norms were. So we don't know for sure with that. I think it may be a little bit of precursor that over the coming months that we may see that improve sequentially from what we're seeing right now.

When you talk about your cost restructuring efforts, it sounds like they're more not so much focused on supply costs, either devices or pharmaceuticals. But I wondered in the midst of this pandemic, has there been any change on that side of the cost side?

Yes. I mean we have several supply cost initiatives in our resiliency plan, and one of them is in the medical device area. And that is working with our clinicians about choosing the most effective product for the services on there. And do we have a little bit of an opportunity to use this as a backdrop, that's important that we play with that. You always have to walk a careful line in that effort on there. We've also got -- have an initiative in our supply chain around, what we say, clinically equivalent alternatives, whether that be on pharmaceuticals or whether that be on other medical efforts on there, that are we utilizing some efforts that may not have the clinical data that suggests there's a difference in that. And working with our clinical operations group, our chief medical officers, with our affiliates, to try to utilize evidence-based data on the suggestion of maybe there's a therapeutic treatment that was being utilized. But the evidence isn't quite there that it's clinically efficient and try to manage that over time as well. And then we just have a host of other just, what I would call, normal supply chain initiatives, whether that be contracting initiatives and the like that are underway. So almost every functional area within HCA has a road map, if you will, or a work stream under our resiliency planning effort.

Okay. And one of the other things you did in reaction to the pandemic was to pull back a little bit on capital spending for this year. The story of the last few years has been the above-average capital spending driving above-average growth. How do we think about the impact of the pullback for the next few years? Has that been targeted in such a way that it won't make much difference? Or should we think it will have a little bit of moderating impact in there?

Right now, I don't think it has any real impact to our growth profile. Many of the projects we dialed back were in the very, very early stages. And we did dial back on the projects that were near completion. And as you know, those are generally -- especially our larger projects that are long-lived projects. It may take you 2 years to go through the construction process, and when that opens, it takes you another year or 2 years to begin to see the return on that. So the pipeline we've had over the past couple of years is still going to feed, I think, in the intermediate term. And we were obviously very attentive to the projects that we did scale back on making sure it didn't compromise growth over the long run. Some of those were maybe freestanding EDs that we paused. And until we see how the ED volume settles out, we don't think that's going to compromise growth in any material way right now. And I think those were necessary steps in the environment that we've seen. And as you heard about, we've slowly turned a few of those back on. And I still think $3 billion, maybe a little less than that, is a target for us in 2020. As we go into '21, I sense it's going to be somewhere between where we are this year and what our historical norms are. It could be somewhere in that 3.5, but we'll have to wait for the planning side. And I think that gives us ample capital capacity to meet growth opportunities that we see in the market and still provide a reasonable level of return for us.

So as we said earlier, one of the things you did on the Q3 call was give some parameters around expectations for next year. What -- when you look at that, what are the biggest, in your mind, puts and takes that are great variability there?

Yes. No doubt in my mind that it's going to -- and sorry, this is a throw, it's going to be the volume demand and it's going to be the profile of that volume demand. And obviously, what we're seeing now is soft volume. But what we are seeing is just a higher intensity and it's overcoming the volume impact. Mix might still be there, but rarely do you have mix change material in any one period of time. That's generally a slow burn. But if you had some really macroeconomic changes, it may affect mix. But I think the big issue now will be just what does demand settle in at, and what is the profile of the patients that we are seeing? With the loss of the lower acuity, the higher-acuity patient generally is bringing a higher revenue with it that maybe brings a higher margin profile. And that's what we're seeing now. And as we go into '21, we'll have to see, does that continue or the things move back to normal level. We feel very confident in our ability to manage the cost given whatever the revenue profile that we seem to be dealing with. So I think the real dynamics are going to be those 2 factors. The others that are in play, will mix continue to be positive for us, will the Medicare population be slower to return, will we see a return of the commercial, that's a driver. I don't know if I see material changes in the uninsured trends right now, absent some big change in an overall economy. I'm actually hopeful the a vaccine is coming out early, and depending on how quickly that can reach population, that may settle that a little bit. But just the demand profile and then the mix of the patients we do serve or the acuity of the patients we do serve will determine our revenue profile that I think will largely drive it. And as we talked on our call, we think we've got a couple of months here. We think where we're at we're getting a reasonable parameter on that. We may have to widen our expectations to provide some flexibility in there, but we got a reasonable view of where that might be, at least for the short or intermediate term going forward.

And then any update on -- I think you were thinking you'd give the government money back maybe by the end of the year. Is that going to happen? Where does that leave you pro forma? And obviously, buybacks and dividends have been a part of the HCA story historically, will that be revisited fairly quickly early next year?

Yes. Well, I think the majority of the repayment can be done by the end of the year. There are some complicated steps you have to go through just in [ taking that ]. We're working with the agencies, making good progress, but feel comfortable to get our share of the provider relief funds paid, and I think the majority of the accelerated payments will be. But we have to do that entity by entity. So that will, I think, mostly be done. There may be some that trickles into next year. But even after that, as you've mentioned, we're still in a very strong place relative to our historical trends on the balance sheet. Our leverage will still be well below our historical range of 3.5 to 4.5 pro forma, probably 3.2, somewhere in that range. And so that does give us the opportunity to evaluate when is the right time to return to our historical kind of capital allocation profile, when is the right time to consider resuming the dividend, when is the right time to consider resuming the share repurchase program. And then obviously, what our capital investment might be. And right now, as we've said, as we're going through our planning, I think we are anticipating coming out in the first quarter, announcing what our intentions are going to be. We haven't made any decision yet. But as we go through the balance of the year and come in and announce in the fourth quarter given further insight, that's what we'll talk about when we think about resuming those areas. And a lot of it -- you look at our view of the position of the company, which is very strong, as we get a read on the marketplace and kind of the stable environment we're in, I think those are really the 2 factors that will influence our decisions on that.

That's great. All right. With that, I think we'll have to wrap it up. I really appreciate HCA participating again this year. And Bill and Mark, thanks for doing it. And thanks, everybody, for dialing in. We'll see everyone soon.

All right. Thank you, A.J., and thank you, everyone.

Take care.