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

Welcome to Oppenheimer's 31st Healthcare Conference. I'm Michael Wiederhorn. I cover the payers and providers space. Presenting today is HCA. We have Bill Rutherford, Chief Financial Officer; and Mark Kimbrough, Vice President of Investor Relations. Welcome, guys. Thanks for coming and presenting. This is going to be...

Our pleasure.

And it's going to be a fireside chat. [Operator Instructions]

All right. So I'll start off with the kind of the normal question in this environment on COVID. Can you remind us on how the business performed as COVID picked up late last year and how the business is performing now early in 2021?

Yes. I want to talk in generalities as it relates to '21, and we'll give you more detail when we release our first quarter results. But we've clearly talked about, and everyone knows, that we began to see kind of what I characterize as our third surge in December. And it really hit its high point in January, and it's since started to normalize back down on there. I think the good news, our experiences through 2020, we gained experience of how to manage through those cycles. And as we've talked about publicly, we anticipated having to be prepared to manage through those different cycles. So we have been able to do that. And I think we've been able to do that very effectively. I think our 2020 results were an indication of that. And as we went into '21, we knew we were in the middle of surge. We clearly saw that peak in January. And since then, we've been able to see it kind of subside. Where it ultimately goes, we don't know, and we're preparing the organization to have to continue to deal with surges. There are really a couple of dynamics that affect your business as you go through those surges. And I think as we gain experience, we're better prepared to deal with those dynamics. Clearly, the first one is having the physical capacity and the clinical labor to serve the patients that you need to serve, especially the composition of those patients. There is an impact on what happens with your non-emergent activity. We've been able to manage through those cycles as we go through these periods of time. And then there's really an impact of what does it do to the mix of the existing patients that you serve. And as you know, throughout 2020, what we saw was really a higher acuity and a higher intensity patient that we were serving as we were dealing with COVID because those were more medically necessary procedures and activity, and we saw the lower acuity activity, slower return to the health care setting. So what we anticipated in '21 is that first half of the year will look more like the last half of '20. And then at some point, we anticipate this recovery period normalizing. We're just going to have to wait to see how that truly does unfold through the course of the year.

Okay. So let's kind of go onto the margin profile on kind of like the acuity. As we see -- do you see significant opportunity from the pent-up demand for elective procedures? And do you expect a material change when you're talking about the margin profile of those type of [ decisions ]?

Well, I do think there is care that's been deferred through this. I don't think that's under question as people were deferring, returning to a health care setting. And the question ultimately is just how quick does that pent-up demand, or however you want to characterize it, begin to return to its historical pattern. And we're hopeful that when the vaccine becomes even more widely distributed in our communities, as we continue to demonstrate that we can safely deliver health care services, we'll start to see that demand return. I think it largely will be in some of the outpatient area or outpatient surgical procedures and the like. And I don't know for sure when it will return, but we expect a return during the course of '21. My belief it's probably more towards the middle of the year. And then we'll have to see how it settles down as COVID, and if COVID throttles down, when is the historical trends and people who maybe were deferring, saying get their knee replaced or some other procedure begin to return to that. Again, I don't know exactly, and I cannot confirm when that happens. But my sense is it's sometime in the middle of this year, and then we'll see how that settles out. But there's no question there was care that was deferred during '20. Some of it probably has returned, and some of it will continue to return throughout the course of this year.

As we think about vaccines, with the elderly population game, the lion's share of the vaccinations at this point in time, are you seeing any movement in that population at the recent?

I can't say dramatically. I mean, as you know, throughout 2020, we highlighted that the Medicare population declines we were seeing were greater, which made sense. That was the more vulnerable population is slower to return to a health care setting. It's too early, I think, to assess the impact of the vaccines. I think, naturally, that's something to expect, but it's too early to give specifics on that, and we'll just have to see how that unfolds going forward.

Okay. When we think about capital deployment, obviously, your balance sheet is as clean as it's ever been. And with the recent resumption of your share repurchase plan, can you review your updated capital deployment priorities in '21? And what is your view on investing in your hospitals to expand services? And is there certain services you're looking at?

Yes. I mean all of those are things -- and I think we gave a pretty good discussion of our capital, thinking on the strategies in our year-end call. But obviously, we had to make some capital decisions throughout 2020 to respond to the uncertainties that were out there. And as a result of that, and I think our team's ability to operate through this, we were really in a strong position from a balance sheet perspective and a capital capacity as we turn the calendar on that. So we -- and I've characterized our capital philosophy for some time as being very balanced and, I think, disciplined in terms of where the opportunities are. Well, our capital is focused first on investing in internal capital to meet growing opportunities that we see. And we talked about -- we see our internal capital being about $3.7 billion, which is up significantly from where we finished 2020. And I think that will continue to allow us to pursue growth opportunities. That's around building in-patient demand, it's around building access points so that we can develop our network, and it's around focusing on certain program and expansion of clinical programs, whether that be cardiology, neurosciences or women services. And I could talk to you a little bit further on that. But once we have the -- our internal capital spending, I think, set at an appropriate level, then we look at what is the balance and the appropriate use that remain in our capital. And as you know, we reinstituted our dividend with, I think, a reasonable amount of growth, and that's an important part of our capital philosophy. And then with our new authorization, we turned the calendar with almost $8.8 billion of share repurchase authorization. And we indicated, we plan on executing the majority of that in '21 and may slide into '22, depending on what market conditions exists. So our capital investment, our dividend and our share repurchase program is important. And then with the balance sheet position where it is and with the adjustment of our long-term leverage ratio that used to be 3.5% to 4.5%, now our target is 3% to 4%. And we anticipate operating at the low to midpoint of that, it gives us ample balance sheet capacity to pursue acquisitions as they may present themselves. So we're able, I think, to achieve all of those: capital investment, maintain the balance sheet for M&A when it presents, returning value to shareholders through a dividend and share repurchase program. And I think that is returning to our capital philosophy that we've had for a long time, but the share repurchase program is at an accelerated level. And we think that's a unique opportunity that we have given our position as we turn the calendar.

On the acquisition front, you recently just acquired, I guess, the home care business from Brookdale. Can you kind of discuss what your thoughts are there, your strategy and why that platform?

Sure. Well, I think it's just a natural extension. As you heard us talk about recently, we've been evaluating moving into kind of downstream opportunities or adjacencies, however you want to describe it, and home care is just a natural extension of our existing networks that we've been developing in our markets for some period of time. As you know, we're developing these large integrated delivery networks. And I think we all believe that over time, more care will be delivered at the home. And the Brookdale acquisition presented a great opportunity to acquire a home care business with a lot of capabilities, a lot of infrastructure and a significant amount of overlap with existing HCA markets. And we have a significant amount of our HCA patients that we discharged to home care that we don't really participate in that today once they get discharged. They get discharged to [ multiple levers ]. so there's just a natural, I think, strategic fit with the ability to move more care into the home, the extension of developing our networks and the fact that we discharge a significant amount of our patients to home that we can now have the opportunity to participate in the broader continuum of care. And having that home care capability also helps and extends into the hospital. In terms of your discharge planning mechanism, working with length to stay, trying to find the most effective and clinically appropriate setting of care for the patients, having that just naturally extends our network. So it's a really strategic acquisition. We've not closed on it yet. So what we did announce was our intent. So we'll work through the closing, that likely will be summer time on there. And with that Brookdale, we also acquired hospice services. And as we see more and more expansion and the need for the hospice and palliative care, that is a natural growth engine to us. So again, as you've heard us talk about, there are a lot of adjacencies in the health care market that the HCA network participates in, but we may not have owned, and we're continuing to look for where are the kind of the next generation of growth opportunities for us. We've talked about in-patient rehabilitation in the past. We've talked about behavioral health. Home care is just a natural extension that telehealth development is a natural extension of that. So it was a great opportunity, and we're really excited about the potential.

That's really good color. So when we think about your -- the M&A front and the pipeline, what do you think you're most focused on? Do you see any larger opportunities on the hospital side post COVID? Do you think the stimulus money is possibly propping up certain hospitals that will ultimately need to sell? What are your thoughts on that?

Yes. I see the M&A in kind of 3 domains, if you will. I think we're going to continue to see opportunity to do in-market acquisitions of hospitals and tuck-in, however you want to describe them. We'll do 3 to 4 a year, it seems. And I think we're going to continue to see opportunities to do some in-market acquisitions. And we have 3 to 5 in our pipeline right now that have a pretty good probability of being executed in there. They're generally smaller acquisitions, and they complement our existing network. The second hospital domain, as you mentioned, is new markets for us. And generally speaking, those new markets would be larger acquisitions because we want to go in with significant presence, just like Mission Health care was in Asheville, North Carolina. My sense is that those larger systems in those -- that would be the profile of that, everyone -- most of us have been dealing with responding to the pandemic, and most discussions paused during 2020. And coming out of pandemic, will those discussions begin to escalate? I think there's a pretty good chance, but it's going to take some time for those to develop, as those systems are dealing with the pandemic, trying to understand what their own environment is. But I think our experience shows that any time you go through some type of disruption or cycle changes, that, that creates the opportunity. And we'll be thoughtful and strategic as we pursue those. We want to make sure they are attractive markets in the right fit. But if they come along, we're prepared, and we will pursue those if they present themselves. And then the third domain is really around network development. One, Brookdale is part of that. Surgery center acquisitions are creating an opportunity as we're seeing the surgery centers that may not have had the depth or durability to survive these cycles where, I think, we're going to see opportunity to move into some M&A in that area. Those are generally smaller but we've been active over the years and maybe urgent care had development, maybe imaging and maybe large physician group that allows us to make significant move into a certain market or a certain program. So we're going to continue to see a lot of activity in the network development side going forward, I believe. I think the larger hospital acquisitions, as you know, those just take a little bit of time to kind of cycle through. And if people were pausing, we'll see whether that activity steps up. And I think there's potential over the next couple of years it probably could, but we'll have to see how that plays out.

Okay. That's great. So you mentioned earlier telemedicine. So can you kind of give us your thoughts around it? How do you expect to include it in your business? Where is it in the future of the HCA organization in terms of [indiscernible]?

Well, we've had a telemedicine focus in HCA for a number of years. And we've been -- we've got a leadership group here that's focused on helping our markets develop telehealth capabilities. We've got a significant amount of telehealth programs across our markets. Most of them have been provider to provider outreach. Clearly, with the pandemic, we saw our telehealth activity for our physician-to-patient activity escalate materially as every health care provider did. And we've made some investments, both internally as well as the investments into a telespecialist network that we've talked about, I think, in our third quarter call -- fourth quarter call. There are, I think, 3 domains that telehealth that we have the opportunity to develop. And I think that will be with us for some time. One is just that physician-to-patient interaction that we've seen, whether it be primary care, and we'll see more and more of that activity, especially for the lower acuity. And we will continue to develop that capability. We have a significant capability right now to do that. There will be the provider-to-provider capability where, say, we have the tertiary facility, and we do rural outreach, if you will, to neurosciences or behavioral health or other kind of specialty consults that those rural or smaller hospitals may not be able to provide, and that provides a great connection for referral capabilities as well as clinical. And then as Sam has talked about, we see an opportunity to use telehealth even inside the walls of the hospitals, where we can maybe do especially rounding remotely And this kind of came out of COVID, too, as you may be able to do clinical care monitoring remotely. You may be able to do cardiology and neuro consults remotely by utilizing the telehealth apparatus that we have developed. So I think our telehealth strategy has activity in each one of those aspects of telehealth, and we think it will be a growing part of just our delivery capability.

That's great. So we'll move over to the labor side. Can you kind of update on your strategy around the physician recruitment? Are you seeing any burnout? Any issues there? And ultimately, are you seeing any change in payment structure with the physicians?

Well, I think it's understood that the clinical workforce is fatigued, and there may be other words. They've been at this for quite a period of time, and we're doing everything we can to support that clinical workforce. When you talk about the physician and the nursing workforce, in particular, I think the physician workforce is pretty stable. Many of our physicians, we have over 40,000 physicians to support the HCA network, many of them are anxious to return to pre-pandemic activity, especially within their clinical practice and may get busy. Many of those were -- they saw their traffic decline, whether it be your orthopedists and others. And so I think the physician environment is anxious to return to pre-pandemic levels. We have to spend time on our nursing and our clinical teams to support them. On there, we are seeing disruption in the clinical nursing workforce. But again, I don't view that as being material, but we're supporting them. And we're seeing some nurses who maybe were within a year or two of retirement, after they've gone through the experiences of this past year, choosing to elect early retirement. We were seeing in the height of the surge of the pandemic, travelers and contract laborers and premium firms offering an incredible amount of pay for nurses to leave kind of a traditional workforce, moving into a traveler. And so that caused us some effort to try to mitigate that. I think that will settle over time. But it's a significant operational strategic priority for us, is to continue to support the clinical labor. But they've been at this for quite some period of time. So it's in a little disruptive period, but we're able to manage through that, and I think that will settle as we go through these different cycles with COVID. And hopefully, it settles at a low point here pretty soon.

So it sounds like kind of moving away from, obviously, the contract labor, that's improving a little bit on the nursing side. If I remember correct, I think you have a nursing school house. Is that -- how is that performing as a feeder to your overall business?

Yes. That was the Galen College of Nursing, which we acquired a little over a year ago, an incredible -- one, they've done a great job and were hugely important for us as we went through this pandemic, and we continue to be extremely excited about the strategic implications of having that nursing school. Our goal is to develop a Galen College of Nursing in every one of our major markets, and we've got expansion plans and sites for that. And if you think about it, it just makes perfect sense. They're one of the largest educators of nurses. We're one of the largest employers of nurses. So you can obviously see a natural fit for that, that not only can we provide an outlet for their graduates for job opportunities, but we can actually use the Galen College of Nursing for our existing nurses to go return to achieve advanced degrees and certifications, and then really just find more and more integration points on there. So again, I think it's just one more effort that we have in securing our clinical teams, and it's been a very nice acquisition for us.

That's great. Moving over to pricing, into contracting. Can you give us an update on your commercial pricing trends? Are you seeing a change in also payment models out there? And also, I guess, as you kind of think about going forward now that we're adding a post-acute side of your business, like you said, getting more heavily involved in home health and hospice, is that going to affect any of your kind of contracting, your thought processes around that or value-based pricing and so on?

Yes. Overall, I think the pricing and our relationships with all of our payers is pretty consistent. There's no dramatic changes there that I'd call out. As we've talked about before, we generally have 3-year contracting cycles, and we have really good visibility into that period of time. We're well over 50% contracted for '22, probably 20%, 25% contracted for '23. And I characterize those terms and pricing levels that are consistent with our historical trends. So no major changes there. But we continue to see opportunities to work with the payers on a much more strategic level, finding new opportunities to find win-win solutions. In the post acute, having home care, it perhaps gives us the opportunity in the future. As we see bundling and bundle payment models and at-risk models, or however you want to describe it, likely we'll be in the post-acute space, modeling after some of the Medicare programs that are out there. Whether that bleeds into the commercial space over time, we'll see. It's principally been a Medicare kind of a bundling arrangement yet to bleed into the commercial side. But if we see the opportunity to do that, we'll pursue it. But I wouldn't -- how I characterize it, there's not really any dramatic changes going on in the structural arrangements that we have between us, us and the payers.

Okay. As we think now, with the shift in the government, in the White House, how do you think from a Medicare rate perspective? Is there going to be change behavior? What are you expecting there? And overall, their attitude in terms of health care services?

Yes. I mean, I think how I think about it is a couple of different ways. There's clearly an acknowledgment that hospitals and health care providers have been critical over these past 12 months [ that's continued ]. So there's a recognition of that. And then we've seen that through funding of the health care providers so that we are there for our communities in especially in times of needs, and the administration recognizes that. We are encouraged that the current administration is working within the confines of the existing Affordable Care Act to find ways to strengthen that in the marketplace to help people find access to affordable coverage. And those are very, very positive things. I think in this initial period, focus has obviously been elsewhere, so I don't, in the near term, have any expectation of material changes in payment arrangements or payment structures. Over time, what the focus may be is still unclear. But I think today generally leans towards the positive side because there's an acknowledgment of the importance of the health care setting, and there's an acknowledgment of the importance of supporting the existing Affordable Care Act structures to help people getting access to cover. And I don't see yet any kind of material changes to coverage or payment terms. But I think as time goes by, we'll just have to wait and see how that plays out.

Okay. With the stimulus bill and, obviously, the enhanced coverage enhancement, how do you think about that relative to where you guys stand right now? I mean potentially as a -- to boost your business going forward?

Yes. I think about it in a couple of ways. I think there are some specific aspects there that are positive. COBRA extensions are positive. Money to continue to fund uninsured COVID patients and the like are incrementally positive for us. I think any effort to stimulate the economy to support employment and support people's access to coverage, net-net, is a positive for us. And so the -- but we understand that at some point, there's going to be a budget reconciliation effort [ that's allowed to pay ] -- to find payment for it. So we have to be aware of those pieces. But right now, I think there are some aspects in there that I would read as positive, but I don't think they're on the margin. I can't call out anything material that changes a trend for us at this stage.

Okay. Behavioral side. Are you seeing any opportunities on behavioral side? Obviously, that's been a hot topic for the last 12 months. What are your thoughts around there and in terms of where it fits into your continuum?

Yes. We have a pretty significant behavioral health presence, I think over 65 behavioral health units. We -- if you go back a couple of years, we're in a period of time where we had really a lot of behavioral health development. Those have slowed at time because we had behavioral health capacity in most of our markets, and we're trying to assess kind of where the payer shift and the fundings levels were. And I think behavioral health will still be an important part of our offerings that we provide in our network. We just think about emergency room activity and others, and clearly, the prevalence of behavioral health in the markets to be a full-service health care provider, you have to have behavioral health. So we'll look for incremental behavioral health development as an important part what we have. We've got dedicated service line leadership there. So I see it's growth trajectory being in line with the company's growth trajectory. I don't see outpatient necessarily. We're looking for are there new ways on there if we can get some freestanding behavioral health facilities versus units inside of our hospitals. We have a handful of those across the portfolio. They've proven to provide maybe unique opportunities for us. So we've got some activity in there, but it's -- I see its growth trajectory being very comfortable with the company's growth trajectory right now.

We're winding down here, guys. It seems like a minute or 2 to go. Just a big picture question. As we exit the pandemic hopefully here, are there any lessons or anything that specifically takeaways going forward on ER or outpatient side, in-patients do outside of the business, anything that you kind of feel like, wow, this is a seismic shift the way that we think about business going forward or...

Well, I think there's a lot of lessons when you go through this. I mean, a lot of them are internal lessons for us that, I think, validated what we believed at scale was important. Our ability to bring national presence to support local market delivery, we saw that in our telehealth capability and the like. And then coming out of the pandemic, we've talked about our strategic focus is finding where is the next-generation of growth for HCA. So we have certain strategic pillars we call new growth opportunities. We've talked about partnership opportunities, you know, are the technology, the opportunity to use new data, technology and partner with technology and data companies to accelerate some learnings. We've talked about moving into some adjacencies inside of our network. And then we've talked about in the past just our internal focus around our financial resiliency, as can we adjust some of the cost structure of the company going forward. So there's a combination of things that we are continuing to execute on coming out of this pandemic. We know that there are uncertainties that will remain with us. So where the COVID settles out at, when people feel comfortable returning to a health care setting, what is the dynamics that we're going to be dealing with. So we've got a host of initiatives underway to, I think, bring HCA into that next generation for us. It's around new growth opportunities. It's around financial resiliency. It's around finding partnerships and utilizing our scale to bring value to all of our stakeholders.

That's great. Really appreciate your time today. I just want to thank you, thank both of you for participating. And hopefully, next year, we'll be back in person live. Everyone, enjoy the rest of the conference.

Thank you.

Thank you, Mike. Great seeing you. Appreciate it.

Thank you.