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

All right. Great. Well, thank you, everyone, for joining us to the Virtual BofA Healthcare Conference. It is my pleasure to introduce HCA Healthcare. HCA is the largest provider of -- an operator of hospital services. And presenting today, we have Bill Rutherford, the CFO; as well as Mark Kimbrough from Investor Relations. So I think we'll just jump right into Q&A.

And I think one of the big things that's on people's minds today is just trying to understand, COVID obviously put downward pressure on utilization. And we're also trying to figure out how to think about the pace and timing of that volume return. So how are you guys thinking about what the rest of this year will look like and as the year progresses?

Well, Good morning, Kevin. Good morning, everyone. I think that really is a fundamental question out there. And as we've talked about publicly, we're going to need some time to see exactly how that unfolds as COVID begins to subside and hopefully reach a normal level or at least a consistent level when will the historical business return. And as we released and talked about our guidance for the full year, we still believe that volume would be a little below our pre-pandemic levels as we referenced to our 2019. Recall we anticipated we thought volumes would still be 3% to 5% below pre-pandemic levels, but that volume shortfall would continue to be offset by serving higher-acuity patients and seeing a higher revenue per unit. So we felt from the revenue perspective, that there -- it would look a little differently, lower volume. But the higher acuity of the volume, we did serve. So revenue would be close to where we were in pre-pandemic levels, and we continue to manage our operating cost effect. So we're going to have to see. I think second quarter will be an important period for us to measure. First quarter was hard to read. We talked about it on our call, what we started to see in March. And we started to see some recovery of volume, whether that was some deferred volume from when COVID was surging in January, December or whether it is -- or people feeling comfortable returning to a health care setting now that vaccinations are becoming more common in most of our communities. Communities are opening back up, and we anticipate there'll be a little bit of a V, and we're just going to see how that V sustains itself. But I do think what we're beginning to see is that the acuity of the patients and the volume that we're serving are higher than they were pre-pandemic. It seems to make sense given the lower acuity that they may find finding in other settings of care. What is returning are those more medically necessary service lines in cardiology, surgical as well as orthopedics. And we're going to have to see how that settles out. But I think second quarter will be an import kind of measure for us to see where that settles for the balance of the year. Right now, I think our original guidance, relative to our volume trends, are mostly still what our current expectations are. And we'll be able to manage through it.

Yes. No. That makes sense. I guess when you think about -- so that's just kind of how we think about the year. I mean if you're thinking about Q4, do you think that those things start to really normalize that the volume number is a bit more like where it was pre-pandemic and that the rate number is a bit more like pre-pandemic as acuity starts to -- as the volume that does come back, to your point, is lower volume and things kind of normalize in that perspective? Or is this like a longer-term trend that we should kind of expect maybe some of this volume never to come back and acuity just relatively stay higher?

I think, generally, we think, over time, we'll return to be more like pre-pandemic. I think there might be some things that stay structurally different, whether the lower acuity finds other settings of care, whether it be urgent care and so forth. But -- and I don't know if that's fourth quarter or if that's into '22, but I think all signs we're seeing is most of our communities are returning back to pre-pandemic levels. We're opening up. Schools are going to be open in the fall. So that, I think, we just believe we're going to be more like pre-pandemic towards the end of the year. The timing and exact period of when that return is unclear for us, but I think we'll return to pre-pandemic pretty quickly. Whether the revenue per unit and the acuity, so I think we found a new level. And hopefully, we'll be able to sustain this new level. Eventually, I don't see you're going to see the same year-over-year growth. We're comparing in the third and fourth quarter to a new book of business compared to '19. Eventually, that will kind of normalize itself in terms of the year-over-year. But I think the absolute level that we'll be able to maintain. And so again, those are the same questions we're asking ourselves or trying to get a read on that. Really until the second quarter, we haven't had a normal quarter. When you look at the third quarter, we had a COVID surge. In the fourth quarter, we're beginning to see it in the post Thanksgiving. Clearly, in the first quarter, we saw it in January and February. March began to normalize. So that's why we've talked to about what we were seeing in March in the second quarter. So I think the second quarter will be a good year.

Okay. That's helpful. And I guess you mentioned that the way that this is shaping up is that revenue, more or less, will be back to pre-pandemic levels, but your focus is on controlling operating expenses underneath that. I think that's been one of the biggest surprises, generally speaking, for 2020 was just how well companies, broadly speaking, you, in particular, were able to control costs. And I struggle with this a little bit because I wonder how much of that is just the ability to manage costs when acuity and revenue per unit is high. And can you -- as volumes normalize, acuity normalizes, prices normalize, can you maintain that same cost discipline as volumes return? How do you think about that?

Well, we are always searching for efficiencies, how to become more efficient on their end. And we were impressed by the team's ability to manage and respond to our revenue shortfalls. And there is a combination that the margin is being driven by the higher acuity revenue, but there's also a cost component to it. And as you've talked about, I see phases in our cost management effort. We've clearly had our initial response of our costs that we had to flex down very quickly because of the revenue and the volume shortfalls. And we cut out a lot of what I refer to as discretionary spending as I think most businesses did. That's cutting back on marketing and traveling, repairs and trying to just contract services, do all the adjustments of the quick things that you could do. I think it's natural to assume some of those costs will come back into the system as we resume, hopefully, close to normal activities. But at the same time with that, we've also talked about, we kind of have these Phase 2s that are longer-term efforts we're focused on to pursue efficiencies that some of those initial response costs come back in, efficiency efforts underway. We label them our Phase 2 resiliency. And some of those, we've got probably 15 to 20 work streams we're tracking that will continue, I think, to show the results over the next 12 to 24 months. 5 or 6 of those are kind of new shared service entities, enterprise efforts that we have. One we've talked about is around laboratory operations. Our laboratory operations remains among our different markets and facilities for some time, and we've now structured that into a common management concierge services that we're rolling out market-by-market underneath our physician services group. We're doing the same around our environmental service support area, our food and nutrition areas, some of our other kind of clinical ancillary support. So we see efficiency efforts that are still underway in HCA that I think will provide benefit for us going forward. We've had the luxury of having kind of the trifecta. We've gotten the higher acuity volume. We've had a favorable payer mix, coupled with our cost management. And that's yielded very productive results for us here in the third, fourth and the first quarter. And so our goal is to continue those trends, and we'll see exactly where each one of those fall out. But I think HCA has a pretty long track record of being able to manage to the environment that is presenting itself to us, and that confidence is -- we're still very confident we're able to do that.

Yes. No, for sure. And so I guess when you think about kind of the margin outlook for this year, do you feel like that's kind of a normalized margin jumping point for thinking about the growth? Or do you think that, to your point, if payer mix normalizes, low acuity comes back, there could be some pressure on that?

Well, yes, that's probably -- we're running at all-time high. And you're 23% of all those are all-time highs for us. So -- and there'll be a period, I think we maintain that. Maybe periods where if we stay in the 20% range, in the 20% plus, we're still very confident with that. I don't know exactly where that will settle. Right now, all indications suggest that we're going to continue to serve a higher acuity patient. All indications suggest that our payer mix will still stay relatively favorable. And again, we are confident in our ability to manage the cost side. So our goal as a management team is to be efficient as well as we can and to continue to serve our patients and service the communities and fulfill our mission. So again, I don't know exactly where that will settle out at. We're clearly running really high-margin levels right now. Our goal will be to maintain them. But even if it's a movement to the 20s to 21%, those are still very, very good numbers for us.

Yes for sure. And I guess, most likely if that happens, it's probably because volumes came back and so revenue is higher. So you're still driving EBITDA.

I think that's right.

Okay. And then we think about the cost side, labor cost is one of the items that I think people are focused on. Seems like most of the hospitals are talking about like temporary labor coming down and that big an area of potential savings. But I guess nurse staffing companies are saying that, yes, I mean, after COVID, shore rates will come down, but the reality is that the supply/demand imbalance is just as bad as it's really ever been. So how do you think about labor costs for you and your ability to staff as volumes come back?

Well, clearly, as we've gone through COVID, the labor force and the labor cost has been pressured. Our teams have done an incredible job of managing it, but there's no doubt that clinical workforce is fatigued after the past 12 to 13 months. We're doing the best we can to support -- we've seen turnover rates high when you're in these public servers, and we've had to support that with backfilling with either contract labor or additional premium labor. And so there has been some pressure on that labor cost piece of that. But the question ultimately will be is as this COVID surges settle and we get to a consistent kind of run rate, if you will, will that labor force began to settle? We've seen the marketplace heat up during COVID as people were paying to be able to attract the nurses, as we saw nurses and clinical workforce going into these contract labor pools because of the really high rates they were being paid. So there was disruption occurring in the height of these COVID surges, and that caused some pressure for us. I think, as a whole, we're able to manage through that, but it is some pressure points for us. I think, ultimately, now that we see settling, we are anticipating those pressures beginning to settle. Where exactly where they will be, I don't know. I think we'll be able to manage it under the construct of the overall HCA cost structure, but that's one area we're paying attention to. We might see a little tick up in some of those labor costs, just so that we can be there and support our employees going forward. But that's one area that has been pressured. I think that pressure will begin to ease as we go through summer and hopefully return to some "normal" kind of operational trends. But the past 12 months has not been normal operational trends, and that's shown itself in the workforce. We -- clearly, we're not the only one seeing clinical workers leave the workforce if they're close to retirement. Maybe they took an opportunity to go retirement. Maybe they took the opportunity to go into some of these float pools and take advantage of some of these hourly rates that were being paid. But I think, over time, that will settle, and we'll be able to manage through.

Okay. I guess maybe going back to the volume question for a second. We have seen what appears to be a shift in volumes, kind of how the inpatient setting into lower-cost settings over time. I guess how are you thinking about the sustainability of that shift? Do you -- as things keep opening up, do you expect volumes to kind of return back to the hospital? Or do you believe that, whether it's surgeries or anything else that have moved out to the surgery centers, do you believe that, that shift is actually likely to just largely stay in those new locations?

Well, I think even pre-pandemic, we all know there was this natural shift that is occurring, and that's been occurring for a decade. So I don't think it's new. I don't know really that I judge it. It's accelerated, have it accelerated even more than our historical trend. Now in any period of time, there's been certain services that move. Clearly, the discussion was around joint replacements moving from an inpatient setting, hospital setting to potentially ASC. Our hospital outpatient surgeries were actually faster recovery, at least in the month of March, than our ASCs. So there is some movement occurring, but we're still seeing it stay within the hospital campus. So I think our view is we'll continue to see some shift from inpatient to outpatient, but we're prepared to capture that without our outpatient settings we have. Right now, we're seeing -- and mostly stay within the campus, mainly because I think those surgeons want to stay productive and so they can operate within the same suite and check the status if it's an outpatient versus inpatient, not so much yet moving into the ASC. Although, that's been a slow move. But I don't think it would surprise us all to see -- for us to see that trend continue. I don't know if it's going to be this sweeping move that creates this void in the inpatient side. We're still seeing growth in the inpatient side, either through new procedures or whether those cases have deferred and are being rescheduled. So I don't take that movement is at the cost of what we're seeing in the unit. And we look at it kind of more in totality, if you will, what is the overall surgery is doing it, there will be a little bit of move. And we're going to continue to see orthopedics move. We may see other procedures move. Not the inpatient-only list has been reduced. But I don't see us -- we don't view that as a material trend change compared to what we've historically seen.

Yes. This is a -- I don't know if I was reading too much into this, but it seemed like you're kind of positioning your outpatient capabilities a little more prominently. In your press release, you kind of have the number of service centers in your data. Is that kind of a sign, to your point, I guess, you're positioning for this shift?

Yes. I think we have for some time. I mean, as you know, we have a very robust outpatient networks that supports our hospitals. And we think the value is in the network with over 140 ASCs. We've talked about our pipeline for ASCs increasing, but we've coupled that with urgent cares and diagnostic, various imaging and our freestanding EDs and our physician clinic capabilities. So we really believe in this network capability. And as you know, we have over 2,000 kind of outpatient facilities. Our surgery suites are an important part of that. So we've been in the development of the outpatient area for well over a decade, if not 2 decades. We've operated a large ASC, so it's not new. We've been part of this development effort on that. And when we think of the HCA network, we want to be a full-service network. We've got, obviously, the full inpatient capacity, but we've got a variety of allocation capacity that we can serve those needs for either patient needs or whether they're the physician needs as cases move in different settings.

All right. And maybe we could segue into M&A. What's your outlook for M&A going forward? Obviously, the Brookdale assets were a little bit of a departure versus what were you saying. So can you just talk a little bit about the outlook for M&A and where your priorities are?

Yes. I would break down M&A in probably 3 or 4 domains. We're going to continue to see opportunities, and we're going to continue to execute on smaller hospital acquisitions that complement our existing market, "tuck-in" acquisitions. We would typically do 2 to 4 of those a year. We have one we just closed on in Atlanta, Georgia. We have one here in Nashville we closed. So we're going to continue to see some hospital acquisition opportunities that support our network, expand some geographic coverage. We're going to continue to see acquisitions mostly in network and outpatient development. There's clearly a lot of those, but they're small dollars when you talk about it. Our ambulatory surgery pipeline is probably as busy as it's been in a long time, both from acquisition opportunities as well as our de novo. Our new center development activity, probably more than a dozen opportunities in that area. So we're going to continue to round out and focus on outpatient development. Then I think about the next domain would be new market acquisitions, and we know those are projects that take longer to complete. Generally, we want to be focused on moving into new markets that we view are attractive from a health services area and that we could take a meaningful position. And as you know, that means those are larger generally not for profit acquisitions. So those have really been on hold during the pandemic as just managing period of time. The question will be post pandemic, will we begin to see that pipeline turn up. We're always in conversations with potential, but there's a lot of variables that depend on will they be executed. We have the balance sheet capability to execute on those, and we're willing to execute on those. If they meet our strategic kind of thresholds, attractive market, high-quality provider, where we can take a meaningful presence in. And we'll just have to see how that domain unfolds. And then really the fourth one, as we've talked about, is new services, new adjacencies, if you will, that will complement the existing HCA service profile that maybe historically we haven't operated in. And home health and our Brookdale acquisition is an example of that, that allows us to really expand the HCA's footprint. It's a very nice strategic acquisition, good overlap in terms of their agencies with HCA marketplaces, and we believe more care will continue to be delivered at a home. It's just natural to see, I think, how that fits into our complement of services within our existing network. And so we will continue to look and evaluate opportunities that expand our service offering. Home health is an example of that. We see some opportunities to expand into inpatient rehabilitation. Most of those are kind of de novo as we invest capital in those places, so we'll be strategic and thoughtful on those. But all of those create growth opportunities for us. Coming out of pandemic, we have a very focused strategic agenda that is around next-generation growth, is around how do we utilize capital to pursue new opportunities around just restoring our organic and historical model and then looking at where are there other portfolio adjustments we can make. So we think all of those are part of our value pursuit to continue to grow HCA as we appropriate.

Okay. That's helpful. I guess when we think about the -- these adjacencies, is the market -- is the plan still that you're going to be very much focused on more market development of these services? Or do you have interest in owning what is a good business in a market where you don't have a hospital system?

Yes. It's a great question, and it's a topic we've discussed internally quite a bit, as you might have imagined. We believe the strength of our network is having a full range of offerings in those fast-growing markets. So our preference still is to maintain operations where we have a full network of health services. It's not to say that we may evaluate continuing to offer services in markets where we may not have that full offering and use those offerings as a foothold to maybe think about further expansion. So we're not going to eliminate that as an option for us. Our preference is to be a full-service provider in a market. But to the extent that we have services where we acquire services that maybe without an inpatient study, we'll evaluate those markets and evaluate whether that becomes an entrée for us. We've done that for a few cases in inventory surgery where we operate at handful inventory surgeries in markets where we don't have an inpatient setting yet. So we'll look at those. Those will likely be a smaller subset, but we still believe the value is in the network.

Okay. That makes sense. And then you also mentioned portfolio pruning. I guess like the sale of the assets in Georgia was a little bit surprising to me. Can you give a little bit of color on kind of why that made sense and then how you're thinking about deploying those proceeds?

Yes. I mean that was a strategic opportunity. Those hospitals, specifically the ones around the Atlanta market, we just didn't haven't over the years, been able to develop the network presence that I just spoke about, partly because of Certificate of Need regulation. We just were not able to develop that network, and we felt we had the opportunity to reposition those hospitals as part of a network as the Piedmont system was able to provide, and we think that was best for those facilities. It was best for those communities that would enable those facilities to support of being a full-service network that we just, over the years, had not been able to develop. And as a result, we haven't seen the growth in those markets going forward. So it's really just a unique strategic opportunity that we have. Really around the Atlanta market, if you will, and Macon, we still operate hospitals in Georgia, Atlanta and Savannah. And the one we just recently announced in Adel, Georgia. So it was really just a unique, strategic opportunity force that we have. And there's a handful of potential hospitals if we can find that opportunity may make sense. They're smaller. I don't see those as really being a material change at all to our strategy, but they were really to allow those facilities to be part of a broader network and better serve their communities than we were able to develop over the years. And what we do with the proceeds, we'll have to see. We have opportunities to invest. Whether it be M&A, whether it be our own capital, we'll just have to see what new opportunities present themselves.

Yes. And I guess how does this transaction, if at all, impact your guidance? I guess I don't think that it was in your guidance, but...

Not meaningful in terms of the earnings guidance and a range accommodates what we have to that.

Okay. And do you get at all worried that the new administration might make it more difficult for you to do some of the acquisitions that you're doing, there's more scrutiny, et cetera?

I think there has been scrutiny on those. Any time we'll evaluate an opportunity, we'll do our own analysis of that. I think there'll be scrutiny. I think -- I don't think that that's our growth prospects in any material way. There might be a market here or there that we could acquire a facility because of our current share, but we still have opportunity to organically move into that or build new facilities like that couple new hospitals opened up in the first quarter in and Lake Nona, and we had one in Denver. We've got one under construction in our Broward and North Gate County. So we still have growth opportunities, even in markets where there might be some FTC issues that we can grow into. But for the most part, I don't think that has any material change in the gross cost.

Okay. And I guess maybe just level type for everybody then when you think about growth prospects, what -- how do you think about the growth algorithm for HCA? How do you think about organic growth and the ability to kind of add M&A on top?

Well, I'll go back to our historical perspective, and we'll have to see post pandemic what these settle out. But fundamentally, we believe there will continue to be a growing demand for health care in this country. And we believe the markets that we operate in, that demand will outpace the nation as a whole because we're operating in economically strong demographic growth in our markets, coupled with the aging population. So we've historically said that we see, on average, anywhere from a 1% to 2% organic demand in the market. So just maintaining our share, we should see that type of volume growth. And then with our strategic initiatives and with our capital deployment programs, we believe we can continue to capture share above just the organic growth that is in that market. And we've historically represented that in kind of a 2% to 3% same-store volume growth. And for the most part, we think that will still hold true going forward. We'll have to see how the pandemic cycles through. And then we can complement that organic growth with strategic acquisitions, if that makes sense, either the tuck-in acquisitions. But from time to time, if we see a new market opportunity, and we can accelerate those growth prospects due to acquisitions. And we'll just have to see how the marketplace produce itself. We have a 20-year history, even longer, that suggests that trend stays relatively consistent. There may be some years where it's higher than our expectations, some years where it's on the low end. But over time, we see, on average, about a 2% organic growth. And we can capture share on top of that through capital and program development, and we'll have to see how that settles over a 3- to 5-year period of time.

Excellent. And maybe just the last question. We barely have time here. You guys announced a large share repo. And just thoughts on that and how you thought about the timing, pace of that repo versus the M&A outlook. Is that a signal that M&A is not as big? Or is it just a more signal that you guys have plenty of cash flow and capital capacity?

No. The latter. I mean, fortunately, we don't have -- we're not in a position to have to make trade-offs . So it's not a signal at all on our view or ability to execute on acquisitions that we think is part of just an overall balanced approach to capital. Obviously, we had to suspend some of our capital programs through the pandemic. And so we turned the calendar with a lot of capital capacity, and we felt that we see more value creation in HCA. So as we think about that, we've got our internal capital program attended to. We got the balance sheet and one of the strongest positions it's been in, in over a decade. And we got the capacity to do M&A and strategic M&A that we see fit. And we've got the -- we resume the dividend. And then we have the excess capital relative to the share repurchase program. And we -- again, we think that's part of just the overall balance and part of a value creation allocation that we have. We believe we'll complete the majority of our share repurchase authorization in this year, subject to market conditions. And so we stay active in that program. We'll continue to evaluate that as the year progresses.

All right. Great. I think that's all we have time for. Thanks very much for joining us today and looking forward to doing this in Vegas next year.

All right. Good to see you, Kevin. It's been a year. Take care.