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

Good afternoon. We are continuing on with our afternoon session of day 2 of the RBC Virtual Healthcare Conference. Our next presenters will be HCA Healthcare. With us today, we have Bill Rutherford, the Chief Financial Officer, Executive Vice President; along with Mark Kimbrough, Head of Investor Relations. Welcome, guys.

Thanks, Frank.

Frank, good to see you. Good to be with you this afternoon.

Well, thank you. Thank you for being with us here for the conference. Let's just jump right in. You've been very busy. We were talking before we went live about the general recovery across a lot of areas of health care. But obviously, you have a lot of other things going on behind -- other than just a recovery. Certainly, your news about the acquisition of Brookdale's home health and hospice assets, you pointed out growing demand for services in the home setting. So my question, I guess, to get started is, is -- do you view this really as a test run into post-acute care? Or is there a bigger master strategy already in place here where we move into more post-acute care?

Well, I see it more than just a test run. As I think about broadly, especially as we're coming off the pandemic, we're kind of restarting moving into a post-pandemic environment. We're looking for where is the next generation of growth opportunities for HCA but we've talked about that. And we think there's adjacencies that HCA operates in that we have the opportunity to look at moving into in a more assertive way, and downstream adjacencies are one of those. And post-acute would be a broader category on there. We think the Brookdale home health acquisition opportunity presents a great strategic opportunity for us, we believe, I think, as many that more care will be delivered into the home. And that acquisition has a nice overlap, 60% to 70% of their agencies operating in an HCA market. And so we have not been in home health for close to 2 decades right now. So we see it as an opportunity to move back here. And with the overlap of those agencies, it's more than a test run. It is a platform by which we think we can grow and provide more services into the home, and it's a very strategic acquisition for us, and we're excited to see that close here in the summertime on there. And it's really part of -- other growth strategies we're pursuing that we discharge a lot of patients to the home but we don't participate in every year. And we've explored that in the past with other new services of finding a nucleus entity, a nucleus company that provides that, that we could use as a platform to grow. Our urgent care kind of services started that way where we bought CareNow what we thought was a leading urgent care company 6 years ago, and we've used that as a platform to grow our urgent care service line. And I think this will give us the opportunity to do that. We are clearly looking at other opportunities. We've talked about our growth of expansion into inpatient rehabilitation facilities, and we see select opportunities to do that in a greater degree going forward.

Got you. And I know certainly in Florida with the relaxation of their CON laws probably makes that a little bit easier to accomplish. But do you -- is Florida the market that you view is most likely in the near term? Or -- I mean I guess it's one of your big states. How about Texas as well? I mean that's basically half your company between those 2.

Well, I think Florida provides us some immediate opportunity, as you mentioned, with the relaxation of the CON laws. We have, I think, close to 65 inpatient rehabilitation facilities today. Most of those are units inside of our hospitals. We haven't been able to expand our Florida footprint as much as we had in some other states. Texas being a non-CON. So that's where we had seen some previous development. Now with the relaxation of Florida, we are dedicating a reasonable amount of capital to grow inpatient rehab units. So Florida will present, I think, the more immediate growth opportunity. But we've been growing rehab now in other states that weren't CON, kind of, restricted again with, I think, 65 inpatient facilities right now. We probably have another 10 to 15 under development as we speak.

Got you. And I also think you've talked about in the past the amount of behavioral health care capacity you have that's very similar to your rehab capacity in the sense that it's mainly units. So any thoughts on that area in terms of going to a more of a freestanding model of and build-out in the behavioral space?

We are exploring that. We have, interestingly enough, close to 65 behavioral health units as well, but we do operate, I think, inside that 6 or 7 freestanding behavioral health facilities. We built one in our Las Vegas market, which turned out to be a pretty successful kind of model for us. So we would look at constructing some freestanding behavioral health where it makes sense strategically. And it actually allows us to free up some space on our med-surg campuses where we can do that. So we were pretty rapidly growing behavioral health. If you went back 5 or 6 years ago, it was growing probably twice the rate of our organic med-surg. Over the past year or 2, it's kind of been more organic growth or the growth has been more representative of the company's growth that hasn't presented the same level on there. So we have services now in most, if not all, of our major markets. So I see the behavioral health growth in the future being much more organically driven growth versus maybe rehab we have the opportunity to put services in markets or facilities that we don't yet have them.

Got you. And what about -- I don't know what's upstream from an acute care hospital. But when you think about other opportunities in health care, I know at one point, you mentioned telehealth, but when you think about kind of the direction health care is going, as health care evolves to more care management or episodic payment models, what are you looking at that's kind of in the new, new world of health care or the future of health care?

Well, it's a great question because we didn't talk about kind of these downstream opportunities and upstream and trying to clarify it. The downstream is more where we discharge patients where we have patients in the network that we want to expand our continuing services. I mean the upstream is more where we can collaborate either with, say, physician groups that are participating in some model of risk or some model of care continuum. We participate in bundled payments, process which has been mostly government sponsored, but moving into the commercial side. We have a variety of, what we would refer to as, clinically integrated networks, where we bring a facility component, a physician or ambulatory component and we look at advancing care management models, quality indicators and kind of jointly manage a population. That's one notch below kind of a full risk kind of arrangement in which we don't do a lot of, but we have some pilots here and there. So there's different models as you think about upstream, where just maybe traditional pay for performance. It may be bundled payments where we can collaborate with an orthopedic group or a cardiology group. Or it may be where we enter into some agreements with an at-risk physician group. Mostly has been historically around Medicare Advantage. We may participate with a physician group, say, in Florida, we have one in California. And we're seeing variations of that entering different markets. And I kind of put this label, a clinically integrated network, where we bring a facilities component, a physician component. And you can either contract direct with an employer or contract with an insurance provider. And you can put parameters around measuring outcomes, measuring membership activity and so forth. So there is exploratory work in those efforts. It's not a major initiative, but we do have a variety of activity in that kind of upstream work.

Sure. I know you employ a lot of physicians and a good chunk of which are in the primary care area. Just curious, there's a lot of talk about direct contracting and kind of, to your point here, this move to kind of taking risk and providing care. Is this an area that you're looking at for your physician groups today? Where are you on that effort?

Yes. So it's broader than just our employee physician group. It really is looking at partnering with the community physicians and affiliated physicians and having a vehicle by which we can not only contract with but that you can manage a membership or a population collaboratively, and you can share risk and share rewards on that. And so we see different models entering the market. We have a whole array of different models that we use, simple, kind of, what I call would be old IPO model, some just contracting models, some shared equity models. I don't see it accelerating dramatically on us, but we're seeing just new models in the marketplace. Some of them are purely with primary care groups. Some of them are with multi-specialty groups, where it becomes very episodic-specific, could be cardiology, could be orthopedic, something of that nature. So again, there are different flavors. There are [ lucent ] contracting entities. There are entities that form that share a risk and reward based on outcomes or some measures. And then there's entities that form where it's really shared equity. And you contract for some percentage of the premium dollar that you manage. And so we have a different variety of models in there that we participate. But today, still a relatively fairly small percentage of our activity, I mean, single digits, if you will.

Right. Well, but it is nonetheless -- it definitely seems to be a change. I can remember Sam's [indiscernible], when people talked about Big Data and taking a risk, it seemed like this was years ago, the conversation was fairly quick, which was nobody's really asking us to do it yet, so we're not going to do it. But it sounds like today that there is a little bit of a change that you're starting to see some of this, certainly, the advancement on the government side and it sounds like maybe some of your commercial payers are looking at. So I guess it is, while it's small, it still is something that's very observable and something that, I guess, we should watch closely going forward. Is that a...?

I think that's fair. I don't think it's really a change. I don't think we're really being asked to move it, but we've always had different models underway. We've had them for years. We've had a joint venture arrangement with a physician group in Florida that we shared some very kind of small episodic risk. So it's really, I would call it, more evolutionary that just occurs through to the marketplace versus -- we haven't changed our posture. We haven't changed our strategic view of the landscape. We don't think the market is really changing in any dramatic way you're asking us to it. But we do have an opportunity, I think, to test different models, see what works, gain experiences and evaluate what their long-term viability might be.

Got you. I guess on the other end of the spectrum, you're adding service lines, but you also are pairing your hospital portfolio, as well. So obviously, you've announced a couple of transactions, divestitures here recently. So maybe if you could give me a little more color on those and kind of the logic behind those? And are there more of those types of transactions out there? Or is this pretty much you're done with that effort? And I'm specifically thinking about the divestitures in Georgia as one of the examples.

No, it's a fair question. In the size of HCA, there's always been a subset of facilities that maybe we hadn't been able to develop the network breadth that we had in other markets. And really, Atlanta and our Georgia markets or a subset of our Georgia market, which is part of that, for whatever reason, over the years, we have been unable to develop the broad network that we had in other of our markets, whether that was certificate of need related or otherwise. And we have an opportunity to reposition those facilities with a strategic partner. And I think it's better for those communities, better for those facilities. It makes a lot greater sense for that marketplace to pairing them with a strategic network that we just had not been able to develop over a period of time. And we have the advantage to maybe divest those in a favorable economic environment. And I'm figuring out are there other ways we could redistribute those proceeds to continue to drive value. So on the margin, relatively small portion of our networks. Those were really unique opportunities that we had and this really was the opportunity to pair those facilities with a broader network on there. We still have operations in Georgia, as you know, in Augusta and Savannah. We actually announced a small acquisition in a rural hospital that feeds our Savannah and South Atlantic network. So again, those were really more opportunistic. There've always been a handful of those facilities we've explored if the right opportunity came along, but it really doesn't signal a major change of strategy for us. It was more of an opportunistic move we made.

Sure. And I guess at the same time, you're on your development side, really real development also, your acquisitions as you point out, you're making acquisitions over in Savannah, and one at here in the Greater Nashville area. But then you also have opened 2 new hospitals recently in Denver and Orlando. So I guess the first question would be, are you seeing a change in the marketplace as it relates to sellers interest in selling? And then I guess I also want to get a little more color on your decision to actually go in and build out and develop [ the network ].

Yes. I mean, I think over the years, as you know, we've been active in adding capacity into our networks, whether that was through tuck-in acquisitions where we had opportunity to acquire a hospital in existing market that expanded our network. We've historically done, what, 2 or 4 of those a year. We've had 2 underway, 1 here in Nashville, 1 in Georgia. And we'll always have the opportunity, I think, to look at those type of acquisitions in there. In addition, we've looked at adding capacity through building hospitals. And like you said, we opened Lake Nona this year. We opened one in our Denver market. We have a larger de novo acquisition opening up in our South Florida market later this year. If you look back over the course of 4 to 5 years, you'd see us building and opening maybe 2 to 3 hospitals every couple of years. So those 2 strategies, in particular, more network expansions and capacity expansions where we could expand our footprint in a growing marketplace, that's been part of the HCA growth story. And then we have M&A, whether it be new markets that will be select if we see a new market acquisition. Mission was an example of that. Savannah part of that. There's always discussions underway. Those take a long time to kind of cure to see if they may fall. But we're open to looking at new market acquisitions as long as they make strategic sense and contributes to what we believe is long-term growth. And then we have acquisitions in the adjacency in ambulatory space. So whether it be surgery centers we don't talk a lot about, but the pipeline in building out and acquiring our ambulatory, urgent care, physician networks and the like, are always part of this, and then really the new adjacency acquisitions like Brookdale represents for us. So I think all of that is part of just what would I think about as a comprehensive growth strategy for us, whether it be deploying our capital for growth, building capacity, expanding service lines, expanding our networks through tuck-in acquisitions, acquisitions through ambulatory care development and network development and then looking at maybe new service opportunities that we have the opportunity to get to. Just part of the growth kind of profile that I think we've had for HCA for some time.

Right. Translating that into numbers, I think you've budgeted around $3.7 billion. Could you maybe -- let's talk a little detail about how you allocate those buckets. I do know that you've got a fairly large share repurchase authorization that's out there. But when you think about whether it's service lines, cardio, ortho, neuro, whatever, inpatient, outpatient versus other opportunities versus stock buybacks. Maybe if we could kind of parse that out into different buckets of that $3.7 billion?

Well, let's start with the overall capital allocation priorities of the company. And our first priority is to invest into our existing markets through our internal capital program, that $3.7 billion. So I'll come back to that. But -- that's our first priority when we think about use of cash flow, how should we invest capital. So making sure that we're capturing growth opportunities. Again, I'll break that down for you in a minute. The second area is to make sure that we have not only the capital capacity but the balance sheet capacity to execute on strategic acquisitions if they become available and the balance sheet is in the strongest position that it's been. And as you know, we've lowered our long-term leverage target at the beginning of the year. So we have capabilities to use the balance sheet and our capital for M&A acquisition. Then we look at kind of the remaining uses of capital, what's the best use, and making sure the balance sheet is in a great position and our access to capital as well. That is about returning value to shareholders. And we've done that through, I think, a balanced approach through resuming our dividend and executing a share repurchase program. So I've always described HCA's long-term capital allocation philosophy as being a very balanced allocation philosophy: internal capital investments, M&A, maintaining the balance sheet, dividend and share repurchase. And when we turn the calendar, we had the opportunity to reevaluate that because we suspended dividend and share repurchase during COVID. So it gave us an opportunity to think about how should we resume that. And we did execute and are planning on executing an enhanced share repurchase program. Some of that was taking slack out of the system because we suspended it in '20 and some of it's looking at opportunities we see to continue to drive long-term value. In the capital investment, going to your question on that, the $3.7 billion, roughly just under $2 billion of that, maybe $1.8 billion to $2 billion is in routine, that's keeping our facilities up to date, refreshing equipment, refreshing technology and the like. And that leaves anywhere from $1.5 billion to $2 billion in the growth capital view of that. And generally speaking, in the growth bucket, you can break it down into 3 growth investments. One is building new inpatient capacity because we see growing demand or we're seeing some capacity challenges. The new hospitals are an example of that, but we also build inpatient capacity for expansion of wings or new units, if you will. The second area in that is, to your point, expanding our service line capabilities, where we have service lines that we're looking to grow, where we have service lines we're investing in to attract physicians. That may be surgical services. That may be expanding orthopedic wings, that may be expanding procedural rooms for cardiology and the like as well as maybe women services as we expand NICU. Emergency room is part of that. We do have continuing investments in freestanding emergency rooms in the marketplace. And then the third area is really around ambulatory, building out our outpatient network. So out of the growth capital, inpatient capacity, program development and ambulatory development. And so as we see us opening up, as we see coming in a post COVID, our capital for '21, I think, represents our desire to go capture those growth opportunities.

Got you. Maybe one question here on the cost side. When you think about labor costs, it's gotten a lot of attention here. It's an issue for almost everyone. How much of that do you attribute specifically to COVID? And how much of that -- so therefore, you would expect to get better? Or you really see a bigger, more structural change in the issue around labor and specifically with nursing?

Well, I think much of it was attributable to COVID. But I don't think if just because COVID subsides that those issues go away. So I think they're going to be a little bit longer lasting for us. There's no doubt what we've all experienced over the past 14 months has affected the clinical workforce more than any segment. They're fatigued. They're tired. They've really been heroic to serve the communities that they have. We're in this period of time where it is creating challenges where you either have people leaving the workforce because they are taking early retirement. COVID put some nuances in there, where we had opportunities for nurses and clinical workers to move into float pools and temporary labor at really incredible hourly rates that were being offered just to meet for that demand. But now that COVID maybe settles to a normalized level, the question is where will that labor supply and demand go? And I think it's our belief we're going to continue to see some pressure on that. I think we can manage it in the context of the whole HCA portfolio. But we are looking at ways to how do we support that clinical workforce and how do we manage through that, and our teams are doing really a great job with them. But I don't think there's any giveaway that the labor market has been disrupted, and it's going to have some impact for a period of time. Again, I think in the context of the size and scale of HCA, we can manage through it, but it is going to pose some challenges that we'll manage through here over the course of the year. I am hopeful, to your point, that it will settle here. It's in a little bit of right after the disruption state, and we'll have to see how that plays out. So I'm hopeful between now and the end of the year, it will balance and settle out as there's maybe not -- there's opportunity for people to move into these traveling workforces as they move out. And so we'll have to see how that plays out. But it does create a little bit of challenges for, I think, all health care providers, right?

And I guess staying on that note, over the course of the year, obviously, people are kind of measuring the year on almost on a month-by-month basis, given the COVID surge we had back in January. But what have you seen in terms of both utilization and then all the rate -- the actual rate for contract labor over the course of the months? And maybe while we're kind of having this sequential discussion, maybe we should just wrap up, and tell us what you continue to see in terms of the return to normal as far as utilization goes, acuity, in- and outpatient procedure? Just kind of a last update or refresh maybe from what you know today versus what you maybe didn't know, say, back on the earnings call? And we'll wrap it up there.

Yes. We'll obviously be prepared to give you a lot more detail when we do our second quarter earnings call. But I think the general things we saw towards the end of last year and even in the first quarter, we talked about -- we saw mostly continue into April. And that was, there were still some utilization challenges, especially when you compare to '19. We're still running volume a little below our '19 levels. But the revenue intensity of the volume we were seeing were quite higher than our historical trends. Some of that was due to the COVID patients. Some of that was because people who were returning to health care setting were a little bit more medical necessary and medically acute. Some of that was the loss of the low acuity business, and we'll have to wait to see how that returns. So that general theme, I think, was continuing on. And we'll just have to see how it sustains itself as we go through the balance of the year. And again, we've talked about that during our first quarter. In terms of the inflationary growth, we were seeing that during the COVID, as you might expect, as we were trying to ensure that we balanced out kind of the labor trends, and we were seeing some incremental growth on our average hourly rates, that was either from utilizing our contract labor at a higher level or because we were providing shift bonuses to clinical workers so that they were recognized for the amount of work that they were providing. And that did provide a little bit of upward inflationary pressure on our labor cost. But again, underneath the revenue portfolio and underneath kind of the scale of HCA, it's an area we've been able to manage through, and I think we'll continue to be going forward.

Got you. Well, unfortunately, we are at the end of our time, but I would love to continue our conversation. But thank you so much for participating in our conference today, and have a great day, and we'll talk to you later.

All right. Great, Frank.

Thanks. Good to see you.

Okay. Bye-bye.