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

The more strategic discussions, I just want to make sure I'm sort of clear on what exactly does that mean. You mentioned centers for excellence. Is it just trying to sort of drive more volume and maybe there being a little bit of a offset on rate to the extent that you get more volume through to your facilities? Or is it more around the evolution of sort of value-based and capitated type arrangements?

I'd say it's more towards the latter. Although we're not moving into capitated arrangements in here, but when we can demonstrate our clinical outcomes and we try to drive value for the plant and their members, that based on the clinical outcomes, our network capability to service their membership, couple them with the economics around that, can we paint a total value proposition that is compelling. And our goal is to how do we differentiate the HCA network to be the provider system of choice. So we try to elevate the discussions more than just a transactional relationship into that realm. And so that forgoes. And again, I think we have great relationships with all of our major payers, and we're able to, I think, find mutually agreeable kind of terms.

Okay. All right. Fair enough. And then I guess sort of the natural next question on that, as you think about sort of strategy and relationships even with the payers. Sam noted in the call, he talked about upstream and downstream opportunities, I think in response to a question, or I think it was in your prepared remarks as well. There were some comments clearly around rehab and telemedicine. But I did want to revisit the comment just to understand a little bit more about what those opportunities are. And how much is it M&A focused in moving downstream into sort of post-acute versus perhaps partnerships and JVs. If you just could provide some color there. I'm sure there'll be follow-up questions off of that.

No, it's a great question. And I think that commentary has generated a lot of questions on here. Here's how I think about it, especially when you think about the downstream. A lot of that is the natural evolution of our strategic growth agenda. I mean, obviously, you follow us for a while. Our focus is developing a comprehensive provider network in these fast-growing, robust markets. And obviously, we do that with a hospital network and a host of outpatient capabilities, surgery centers, freestanding EDs, physician clinics, urgent cares. And so what we're evaluating is where is the next generation of growth for HCA. And we look at the business, if we will, that we generate out of our network and how do we find greater participation in that downstream. That's where that term comes to. And so when you think about that, we discharge a lot of patients to inpatient rehabilitation that we don't have a large presence in that area. We discharge a lot of patients into home care, that we don't have a presence into home care today. And we discharge patients into other settings. So we are evaluating where are these adjacent services that we don't currently have that we can look at expanding to as part of our expansion of the HCA provider network. And so we're looking at those adjacencies. Many of those will come through M&A. And so we look at M&A in the hospital space in end market and new markets. We look at M&A in the outpatient network development, surgery centers, urgent care, physicians clinic ED. And we will look at M&A to evaluate whether it makes strategic sense for us to move into these other areas, behavioral health, rehab, home health or some of the areas that you could think about as moving it. We have some of that, and we're saying, as we think about looking for new growth and expanding our network so that we can continue to differentiators, that's an area we're looking at. So that's what that comment really related to. And we'll have to say some are at different stages of evaluation, some are at different levels of discussion. Florida, for example, as you know, deregulated CON relative to inpatient rehabilitation. So as we think about that, we don't have inpatient rehab facilities in the state of Florida, where like -- where does that create growth opportunities for us. That may be capital deployment, but it may be acquisitions that are select that makes sense, select acquisitions of specific units on there. So we will evaluate a variety of strategic opportunities, and we don't know how they will materialize. But that's what that comment really related to. There's really a signal, and we're looking at next-generation growth post pandemic as we're coming out of the pandemic. We fundamentally believe health care demand is in the marketplace. We fundamentally believe our networks will be well positioned to serve that demand. We could differentiate ourselves through a variety of tools and techniques. And then are there new revenue streams that we should pursue as all part of our strategy to just continue to enhance value.

Yes. Makes sense. What about with some of the relaxation of Stark laws? Is there opportunities instead of actually buying to sort of partner and JV and ultimately capture value and sort of an earnings stream without necessarily the capital investment that needs to go into some of these other post-acute services?

There's potential. I don't know if it's driven by storm necessarily or not. But yes, we will explore a variety of options that make sense. And JVs, or a joint venture relationship could be it. Historically, what we have is, what I'd just call, clinical affiliations. So that we -- there's a lot of clinical alignment of having those post acutes. You can better manage that patients continuum. You can maybe affect readmissions. We can use some of those -- excuse me, such as rehab and home health, around case management and discharge planning in our hospitals. So we will continue to search for clinical alignment and value proposition on that as well. So to answer your question, yes, there are other models that we can have short of capital or acquisition and maybe JV. Many of those are capital-light. So they're are generally capital-light investments for us compared to a hospital capital structure in place. So -- and fortunately, we're really not capital constrained right now.

Right. Understood. I guess, does this all circle back to sort of what we talked about earlier in terms of maybe more risk taking and more capitation. Is that sort of the -- you're talking about this sort of next generation. Is it trying to get closer to that premium dollar? Or am I overthinking it? Or is it way too early to start thinking that at this point?

I don't think it's early. Our focus is to invest in our provider network and differentiate the HCA network on quality and cost and efficiency and service and all of those attributes. So we're developing that network. That does not necessarily mean that we have to change our revenue model. And so I always draw this grid and investing and developing your provider network versus evolving your revenue model, which is really what all that is doing for us. I don't think you can evolve your revenue model without first having a robust provider network. So they're not necessarily sequential, and I do the provider network, then I'm going to go chase the premium bill. That's not our strategy right now. We do think there might be opportunities or select efforts to evolve and test new revenue models. bundled payments, as an example, we're seeing those accelerate. We have in, from time to time, episodic risk for certain carriers. There are times we have relationships with delegated risk providers for a certain amount of the premium now. They're really small in nature relative to our revenue stream. And I don't see that really fundamentally changing rapidly in any near term. But if you are going to do that, you have to make sure you have an adequate network. And we are developing robust networks. And so if we see an opportunity, we would pursue it, but our strategy is not to go change our revenue model. Our strategy is to develop the best provider system in our network.

Okay. All right. Fair enough. And I guess one more to drill down on that. More on the growth in outpatient and ASC. It's obviously an area you're already in as opposed to some of the things you talked about in terms of incremental opportunity. But particularly coming out of COVID, it's sort of a hot area, if you will. Maybe just discuss your strategy. You clearly have a large ASC presence that I think it's overlooked a lot. Maybe just development pipeline and overall strategy specific to the ASC.

Well, ASCs, we have 150-plus ASCs. Our development pipeline, I would describe, as robust. In any given year, we'll do 3 to 5 ASC projects, either de novo or acquisitions. This year, we have a lot. We have several de novo where we're building new centers. And our acquisition pipeline is probably more robust than it has been in recent years. So I think the pandemic has provided some opportunities for us to even accelerate our expansion in that area. Now we'll have to see how that plays out and the need to do those actually get actionable. But right now, the pipeline is pretty robust is the way I would describe it. And as you know, we have over 2,000 outpatient settings of care. In addition to our surgery centers, our urgent care network has been growing rapidly for us. Our freestanding emergency room, our physician clinics. So we look at that outpatient as a continuum theater into our hospital. I think we mentioned in our call, on average, every one of our hospitals has 12 to 15 kind of outpatient institutions helping feed and develop that. So ASCs, we're optimistic that will continue to provide growth for us and then we see growth in these other outpatient areas. I think that they may provides some of those opportunities because many of those providers may not have had the sort of the durability to survive the cycles that we've been through. So they're looking for a partner with that. And that has created hopefully some short-run opportunities we can capitalize on.

Yes. And then just to round out this discussion, what about the physician strategy, right? Like it seems like there -- well, at least we hear a lot more of a push toward more value-based and capitated arrangements and all that sort of accelerating. I guess are you seeing it impact you at all? Does it cause you to rethink your strategy? And maybe just for context, if you can give us a percentage of your affiliated doctors that you employ?

Yes. So we employ probably 8% to 10% of our active physicians, and then we have others and various others relationship. So our physician strategy is focused on making sure we have the physician and the professional complement to provide the services that we're developing and that we provided it. We have over 45,000 physicians that are affiliated with our HCA provider systems on there. And we employ 10% to 15% of those. And then we have a large group of our hospital-based physicians and joint venture relationships on there, probably 10,000 when you combine the 2 together on there. So we believe it's an important part of us, obviously, being able to develop health care settings. It's not necessarily -- we're not developing our physician strategy, again, to evolve our revenue model. It is to make sure we've got the ability to deliver high-quality health care services on there. That being said, what we do see is often the introductory -- introduction of some of these new revenue models starts in the physician space. It is either with taking some delegated risk in a physician group, some episodic kind of very contained risk in there or that eventually you'll need the physician network in our primary care, in a physician hospital organization or the like to be able to manage a population if you wanted to pursue that. So you often see the introduction of these new revenue models or evolving revenue models beginning or having a strong physician component. But our physician strategy is focused on making sure we have the right physicians to deliver our quality services and then evaluating what is the right structures to pursue to be able to deliver those services. And we do have almost every flavor of model you could think of, whether it be just the traditional clinics where we're doing fee-for-service. We've got PHOs where we have relationships. We've got equity relationships and some delegated risk models. So we have a whole host of those models in play that we could understand and we can get some learnings from them before we have to really advance in any big way across the entire company.

Okay. That's interesting and helpful. [Operator Instructions] I'll look through my e-mail box to see if I find any. Otherwise, I'll just continue to ask my list here. And let me just jump in maybe to the cost side of the equation, Bill. First, I guess, let's start with the labor line because I think you've managed it pretty well given the circumstances. Any incremental pressures there? There's been a lot of discussion around sort of burnout factor. You see any more higher churn, contract labor, maybe wage growth expectations. We'll start with the labor line, then maybe talk about other cost line items after that.

Yes. It would be hard to avoid to say that, yes, there are labor pressures. I mean these whole cycles that we've been through with the surge of the COVID has provided some disruption to the labor market. None of which are judged to be material that we can't achieve our expectations or guidance. But things that we have to manage through operationally that from time to time put pressure on you. And to me, I think there are really 2 dynamics we're seeing in the labor market. And I don't think there are any great revelation, but we're seeing some people leave the clinical labor market, that's either because the COVID environment, and they've been at this a year now and maybe retirement was a year or 2 away, and they are choosing to leave the clinical workforce earlier than planned. Or the second dynamic is because there's these surges and these demand peaks that you have, there's a demand for nurses and clinical workers to move into these contract labor pools to get opportunities of making more money, traveling to other markets to serve. And those 2 have put pressure and disrupted the labor market a little bit. None to a degree that we can't mean it's through and we have to respond to that -- those disruptions, either by we have to utilize a higher level of contract labor. As you know, we have our internal staffing agency, HealthTrust, work for solutions that allows us to respond to those pressures market by market. So we have an avenue and apparatus to respond to that. And we also have to think about responding to that, that we pay our employee nurses adequately and fairly and make sure that they're recognized for that. It's hard for them necessarily to know that they got to contract labor nurse working side-by-side with them, and there's a differential what you have to pay. So we have to acknowledge that. And we try to do that through bonus programs or shift differentials or the like. And so as you go through these really accelerated cycles mainly driven by COVID surges, it puts pressure on that labor market. And we manage through that. Again, none that I don't -- that is overly material to us financially, we can't mean it's through it. And we have other kind of cost initiatives. We try to advance to counteract that at any period of time. I believe that as COVID begins to settle and decelerate probably to a normal level, that disruption begins to subside and we can get to normal levels. But if you just think about what the industry, if you will, or the hospital providers have gone through over the past 6 months, these peaks in values of demand has had an impact on the labor force, and we have to have to respond to it. And so what we do and what we pride ourselves is trying to respond to it appropriately and recognize the value that our clinical care workers provide and compensate them. And then when people choose to leave the workforce, that we could backfill and offset that appropriately.

Yes. Makes sense. And I guess, just a broader question that incorporates sort of the cost piece to it. How do you think of the margin structure of the company at this point? You've hovered around that sort of 19% mark. Is that -- is it more about sort of growing the top line at this point, the margin expansion? Or how do you see the opportunities at the margin line?

Yes. I mean we're very pleased with where the company runs its margins historically. And then obviously, towards the last half of '20, we had outpaced margins because of the factors we've talked about, the acuity and the mix and the like. And as we think about going forward, again, I think the beginning of the year will look more like the end of the year and then will settle back into normal trend. As we think about over the long run, the margin profile of the company, it looks more like it was pre pandemic in that '19 to '20 level, if you will. The path to margin is more top line driven than it is cost side driven. We continue to believe we have cost opportunities. And I think HCA has a long track record of pursuing to provide the most efficient care that we can. And we've got a lot of cost initiatives in the way that we feel confident we can control the cost structure on there. But the margin pathway is around top line. How do we leverage the fixed cost structure of a health care setting? How do we develop higher acuity services? And just how do you focus on drawing the top line? That is the pathway to margin. Clearly, pricing acuity and costs are the ingredients there along with mix. And so we have strategies that address all of those.

Yes. Got it. Makes sense. So I guess next topic, maybe a little bit on the M&A side. It's been a couple of years since somewhat larger transaction with Mission Health in North Carolina. Are you seeing more opportunities? Or is there a pause as sort of hospital systems kind of see if they can land back on their feet and so maybe time lines pushed out? Just what's the opportunities more for sort of some of those systems M&A?

Yes. It's a great question. When I think about the hospital M&A, obviously, we talk about the in-market acquisitions. Those are tuck-ins, smaller hospitals generally that round out an existing footprint. We would historically do 2 to 4 of those a year, generally smaller acquisitions. And at any given time, we have 3 to 5 in the pipeline, and they'll conclude on some pathway. That domain hasn't been interrupted. We still have 3 to 5 smaller hospitals to pursue that really complement an existing network. The new market acquisitions -- and really Mission, as you talked about, was our most recent one, and then Savannah before that. Before those 2, we haven't really, as you know, had a new market acquisition. I'd tell you, in the COVID era, those discussions really paused. There's no -- the profile of those new market acquisitions for us are larger systems in new markets. And during the past year, those systems, like us, were focused on dealing with the pandemic and COVID. So I think I'd characterize those discussions as largely on pause as we went through COVID. The question will be as we get through the COVID environment, will we begin to see those discussions accelerate or more of those come our way. Historically, when we've gone through any kind of market turbulence or cycle, on the other side of that lends itself to more opportunities in that arena. We don't know whether that will play out, but I think I'd characterize in those new markets generally paused right now. And as we begin to get to some level of normalcy in '21, maybe '22, we'll have to wait to see when those pick up. I will tell you, we're open to those as they present themselves. We think we'll -- we know we'll continue to be strategically oriented and disciplined to make sure it's the right system and the right market and meets the HCA profile. But if some of those present themselves that we think check our boxes, we'll be willing to pursue those. The good news is we have the balance sheet capacity as well as the operational capacity to explore those if they do materialize.

Yes. Makes sense. And then shifting just to maybe CapEx spending. The $3.7 billion is certainly up from 2020. It is a little bit below 2019 levels. So is that just a reflection of 2019 being inflated? Is it just some abatement given the uncertain backdrop? Just how you're thinking about capital spending at this point?

Great question. And it is a significant increase over '20, but we recognize below '19 than what we originally planned. I think the capital plan we have for '21 is adequate and compensates and allows us to pursue all the growth opportunities or pursue the growth opportunities that we see. And I do think we have the capital capacity that if we see more, we'll throw all that up at a level that we think is appropriate. But right now, our planning horizon is that $3.7 billion number or thereabout. We think that is able to go after adequate capital. And then as we want to take some time to judge the market, when does demand return? What is that demand returning? And there are some elements that in '19 and '20, we had a high level of capital. Those are coming online. We have 3 new hospitals coming online this year. And so those were consuming capital in '19 and '20 and now we can operationalize them. We don't necessarily need to dedicate that same amount of capital. So there's a little bit of that at play as well. So remind you about our routine capital is probably $2 billion or so. So that leaves us that $1.7 billion of excess to devote towards growth capital. We see it coming in inpatient capacity, but we have inpatient capacity. We're still running below '19. So we could take a little bit of time to see when does that demand return. And so some of our capital was dedicated to emergency room expansion. But with the emergency of volume, we can have the opportunity to wait to see when does emergency room traffic track back in. So again, I think that level, although is below -- a little below '19, is adequate enough for us to pursue the right amount of growth volumes.

Makes sense. And somewhat related to that, you did take down your leverage targets from that 3.5 to 4.5 to 3 to 4. You said I think you expect to run at the mid or lower end of that range. And I think just based on the guidance for 2021, you'd be running at about 2.9x. You'd be sort of running below already. So in the context of every half turn being about $5 billion, just trying to understand how proactive you are going to be in terms of levering up if you do fall below that 3x level?

We'll have to evaluate the market when it has it. But I expect operating between that 3, 3.5 level in the near to immediate. There may be opportunities for us to go a little higher than that if a strategic acquisition presents itself. We may fall a little below that. I don't think we'd stay there very long. We're going to -- we're planning on operating in that level. We lowered it because we really -- we're stretching to find any scenario that we would be in that 4.5 range. And so that's really why we lowered that. As you know, we ended the year at 3, balance sheet is in a great position. And it led to us to be able to announce an enhanced share repurchase program. And so when we think about the capital allocation, I've always described as a pretty, I think, balanced and disciplined approach. We have our capital program funded appropriately. We've got the balance sheet position that we can execute on a M&A transaction that presents itself and when they present themselves. We're returning value to shareholders through the reinstated dividend and now this enhanced share repurchase program. And so we think that composite is a good place for us. And then if we find ourselves well below that range, then we'll decide what is the appropriate adjustment at that stage. But right now, I think everything we have planned will land right at the low end of that range.

Yes. Certainly a good problem to have for sure.

Yes, it is.

You mentioned repo. I want to go there, right? So your share repurchase authorization, now you've got up to, I think, $8 billion-ish. And the commentary was you do expect to go through a lot of that over the next kind of 1 year, 18 months. Again, is that Is that just a reflection of kind of where you see your business and the opportunity? Or does it speak more to sort of more limited -- I don't know if I should call M&A opportunity, but just more limited ability to spend that amount of money?

The form -- it doesn't -- it is not a commentary and our view of the ability to deploy capital to capture growth. We think we have that adequately covered. And we will continue to deploy capital to capture growth. And we think there's an adequate amount of growth opportunities to go pursue. So it's, by no means, a commentary on -- that our growth profile is limited. In fact, just the opposite. We see a lot of next generation of growth opportunities we're pursuing. But it does speak to, I think, the financial strength of the company and the cash flow generation. And it speaks to the actions we took in 2020 to position us to be able to reinstate those programs. And it speaks to the fact that we think the intrinsic value of the company is maybe higher than we currently get recognized for. So all of those go into our thinking about what is the appropriate allocation of capital. And so it's multivariable, but it is not a commentary on the fact that our growth prospects are limited. We see continued opportunities to deploy capital for growth. And it's just the fact that we find ourselves in an incredibly strong position from where the balance sheet is, from where the cash flow generation of the company is, and we think it's appropriate kind of return value to shareholders. We know the shareholders, we've suspended the dividend and we suspended the share repurchase. And so some of this has taken up some of the activities that we -- and the decisions we had to make at '20. It's also a reflection of what we -- and the confidence we have in the continuing cash flow prospects of the organization.

Very good. We are up against the time right there. So I think we're going to leave it at that mark. Bill and Mark, thank you so much for sharing some time with us, and look forward to talking to everybody soon.

Okay. Our pleasure. Thank you.

Thanks, Ralph. Good to see everybody.

Take care.