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

Good morning, everyone. This is Jim Forbes from Morgan Stanley. I want to welcome you to the HCA fireside chat this morning. We have with us Bill Rutherford, Executive Vice -- excuse me, Senior Vice President and Chief Financial Officer of HCA; and Mark Kimbrough, Head of Investor Relations. I want to read a brief disclaimer before we begin. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Bill, Mark, thank you for joining this morning. We have a number of people dialed in.

Just to start off with a few questions. HCA announced recently a partnership with Google Cloud to accelerate digital transformation. Can you just tell us really what does that mean? What is it all about?

Yes. Well, good morning, Jim, and good morning, everyone. We're really excited about that announcement with Google. And it's really a continuation of work we have going on around utilizing our clinical scale to improve care at the bedside. And as you might know, we have had a number of initiatives underway utilizing our clinical technology. And I think just around clinical technology and advancing analytics are some of the most exciting things we have going on within HCA, specifically around developing application and tools to help our caregivers deliver care and as well as our operators have better insights to their environment. And you might know, we've talked about a number of times applications we've developed. One was around sepsis identification, where we can use big data techniques and AI algorithms to monitor clinical information with patients. And if we begin to see patients show signs of -- early signs of sepsis that could eventually lead to sepsis shock, we intervene real-time through mobile capabilities. And so we have a number of applications that we think and really excited that the Google partnership can help accelerate the development of those tools. We've talked about the development of maybe an intelligence net that can lay over our activity and being able to use big data techniques and utilizing AI to help identify opportunities for the next best action for both our caregivers and our managers. So we're in early innings of that, but we're really excited about the development activity, really the marriage of HCA's capability and our scale and the access that Google provides with really big data and engineering and the acceleration, developing of new applications. We've got some really exciting use cases that we're pursuing right now.

Great. Bill, just obviously, HCA has always been very, very focused on capital allocation and very disciplined. What are your latest thoughts on capital allocation, particularly as it relates to buybacks going forward? And I guess, the second part -- and the second part of that would just be your thoughts on leverage and leverage parameters.

Jim, well, I really think that the balance sheet position and the capital position of the company is really at a great strength. And as you know, we're really focused, over the long run, what I view as a disciplined and balanced allocation of capital, with our first priority of capital of investing into our existing markets through capital investment programs, and we think we're adequately investing capital to meet the growth opportunities we see in the marketplace, anticipate that hovering around $3.7 billion of capital investment today. The second area is around maintaining the balance sheet, so that we can execute on strategic acquisitions as they might become available. And the balance sheet is very well-positioned, I'll talk about leverage in a minute, and then really looking at kind of the best utilization and returning capital to shareholders through a dividend program and through a share repurchase program. And as you know, as we turn the calendar in '21, we announced an enhanced share repurchase program that I think really recognized the capital strength of the company but allowed us to continue to allocate capital in really a balanced format. The leverage of the company, as you know, we lowered our long-term leverage targets to be between 3x to 4x leverage. And that was about 0.5 point decline from 3.5 to 4.5 earlier. We're running below even the low end of that leverage. And I think that gives us more opportunity to be flexible and be opportunistic as we see capital deployment opportunities going forward. But I think the balance sheet position of the company is in a very strong position. And as we continue to go through the balance of this year, go into our planning for '22, we'll assess where -- what's the right adjustments to that. But between capital investment, maintaining the balance sheet for acquisitions and then appropriate return to shareholders through a dividend and a share repurchase program, I think, will be -- will continue to be an important part of the HCA story.

Great, Bill. We have a question from the audience, just regarding, you had mentioned acquisitions. Away from acute care hospital acquisitions, are there other areas where HCA is focused? What would be some of those areas?

Well, I think the acquisitions, falling in a couple of different categories. And clearly, around acute hospital acquisitions that support our existing networks or if we had an opportunity to explore a new market, we've got the capability and the willingness to do that. Most of those are strategic opportunities that present themselves. We continue to be active in acquisitions around our network support, whether that be ambulatory surgery centers, urgent care, as we continue to build out our integrated delivery networks in our markets. And then we've recently, as you know, looked at acquisitions into new areas. And our acquisition of the Brookdale home health and hospice operations was an example of that as we see an opportunity to continue to evolve and expand our network through new services. And so the Brookdale acquisition, I think, was an important strategic acquisition for the company that allowed us to acquire that enterprise that had nice strategic overlap with the company, allowed us to move into home care and hospice and I think will eventually give us a platform that we can continue to grow on. So we'll continue to look for acquisitions in all of those domains. Our hospital acquisitions, our outpatient and ambulatory and to the extent, there's new service opportunities, we'll evaluate that as long as they continue to meet our strategic and long-term objectives.

Great. A follow-up to that question regarding, do you anticipate going into home health, hospice outside of your core markets that's sort of just entering new markets via home health hospice or will it be focused primarily on your existing acute care markets?

It's going to be focused primarily on our existing acute care markets. There was an announcement yesterday that we've entered into a preliminary agreement to sell the Brookdale assets that are not in an HCA market. So we believe in the strength of the network. And we believe there's value in that network capability. And as you know, our strategic approach to our markets have been creating breadth of network and depth of capability. And so we really see that's where our efforts will be focused. There might be a select opportunity here and there that allows us to enter into a new market without necessarily that breadth, that maybe if we have an opportunity to move into a surgery center in a market where we don't have one. But we believe the real value is in the network development. So our focus will continue to be in markets where we have that full range of services from an acute care network, to an ambulatory and outpatient setting as well as physician and support services around that. And so I think that's primarily where we're going to be focused, but there might be an opportunity here or there that allows us to move slowly into a market where we may not yet have a presence.

Right. Question in terms of, how are you managing through now the Delta variant and some spikes we've seen in the Southeast United States? And are you seeing less disruption in some of the elective procedures and outpatient procedures now versus what you saw a year ago? And I guess, this all comes under the rubric of what are the lessons learned thus far.

Well, clearly, as we all know by reading the papers, we are in the fourth surge, and we've been in there for a couple of weeks. I think how I step back and characterize it, our teams do an incredible job. And we've been through these other surges. We had the first area in spring of 2020. We had the summer of 2020. We had the winter in January and December. So our teams have gained a lot of experience. And our ability to navigate and manage through these surges has really proven over the time. And that includes how do you manage through managing the elective activity? How do you manage through the capacity side? And our teams have done an incredible job. I think each surge probably has a little bit different characteristics, and we'll continue to evaluate it. But we're doing -- and our teams are doing an incredible job of managing through this wave. We're hoping we begin to see some dissipation of that soon. But in terms of managing elective, managing capacity, managing the staff, it's all done facility by facility. This was a little different as that compared to the first one, when we had government-mandated shutdowns, we don't have that right now. In January and December, we really had the ability to selectively manage through that. We are still operating our ambulatory surgeries, outpatients. And so our teams are managing through that very effectively. And I think the experiences we've had over the past 18 months have really proven to help us navigate this current surge going forward.

Great. Some of the themes we've seen here over the last 18 months in health care are, I guess, what you might call the tech-enabled primary care practices, increasingly taking risk, focused on value-based care. Some of the larger health plans, Humana, Anthem, investing in some of these platforms, some going public. What is HCA's -- how does it impact you in some of your markets? And what do you think your strategic response is going forward?

Well, as you know, the good news about HCA, we have such scale that we have the ability to test different models. And we have different models playing out market by market. So with our physician network supporting our overall inpatient and ambulatory care network, we have the ability to develop and test new models. And we have these models that have been in play for many of our markets for a number of years, whether they be delegated risk models, specifically around Medicare Advantage and we can work with a physician group to manage a population on there, whether they be very specific carve-outs for episodic areas that we can have and then really partnering with some of these developing groups as we can become their network of choice going forward. So we have the ability to develop ourselves, and we do from time to time where market circumstances suggest there's an opportunity and partner with others that are doing it going forward. I don't necessarily view right now, see it as a major disruption of activity. If you look at some of our big markets, especially in Florida, some of our California markets, these physician management of populations and delegated risk have been in play for a number of years. And those are markets that we tend to do very well at. So again, we can be really select in our response, and we can partner with these entities as they unfold going forward. And then we've got the ability, and we are developing some of those capabilities, around with our own employed physician network that we have.

Great. Can you comment on what you're seeing, recent trends on the labor front, turnover, wage pressures, et cetera, I guess a particular focus on RNs, LPNs, what you're seeing on the labor front here?

We'll plan on providing more detail when we release our third quarter results. But there's no question the labor market has been pressured for some time, given the COVID activity, given all of that. Again, our teams do an incredible job of managing through that. And as you might imagine, we have a number of initiatives to respond to that, including we have our own HealthTrust Workforce Solutions, which is our own temporary staffing that we can use to fill in. We've got a number of responses in terms of recruiting and really highlighting the attributes that coming to work for HCA has. And we have the ability to help our employees through bonus programs of different shift covers. So again, I think as we've gone through this past 8 to 12 months, we have a number of initiatives to try to respond to what we know is a pressured labor market. And again, I think our teams are doing a great job of managing through that.

Great. HCA historically has been very focused on managing its portfolio of assets. A question regarding, is there a portfolio of assets that could potentially be a spin out of HCA vis-a-vis going way back to LifePoint at any point?

I don't think we're going to indicate that there's a large portfolio that would end up in a spin, specifically. We're very pleased with the portfolio that we have with HCA. From time to time, we have an opportunity to make some refinements to that like we did with the Georgia assets that we announced not too long ago. Those are really small and on the margin and where we could not really develop the network capabilities that we have in other markets on there. So no, I don't think there's a portfolio in there. We're very pleased with the portfolio that HCA has, the markets that we're in, the growth prospects that they present, our ability to invest capital to continue to differentiate us. There may be, from time to time, one facility here or one facility there that we have an opportunity to maybe reposition it with another system that has some network capabilities that we may not have been able to develop. That was the case of our Georgia facilities. But nothing in terms of scale that I see. Again, we're very pleased with the networks that we do operate.

Right. And another question regarding revenue cycle. Obviously, HCA has a very significant revenue cycle management business. Ever any thoughts about taking that public, spinning, anything? A question that we've had from the audience here.

No. As you know and others have, there was a time 6 or 7 years ago with our Parallon entity, we looked at providing those services externally to the marketplace. And we still do some external provision of our revenue cycle services on there. But our primary focus is to develop the Parallon revenue cycle internally into HCA. And that group and that team has done an incredible job with us. And we think there's a lot of value, continuing to have them focused on our revenue cycle going forward. So we don't have any plans to separate it, spin it. From time to time, we will provide services to some external clients, but that's a really small part of that business. We really see a lot of value creation, of integrating and continuing to have the Parallon team focused on the HCA top line revenue clearance. And again, they're doing an incredible job and really has differentiated us, I think, across the markets.

Right. A question regarding HCA's policy on vaccination and mandating vaccination. What are you -- what are your thoughts on that? We've seen not-for-profit hospitals in some markets, Texas, Florida, start to mandate vaccination for their employees. What are the latest thoughts of the company?

Well, it's an area of a lot of discussion, as you might imagine, and that every company has had. We have not yet taken the position that we're going to mandate vaccines across the marketplace. We do obviously encourage the vaccinations. We have policies in place for employees to ensure that they're taking necessary safety protocols and precautions through masking and the like, but we're not yet at the point of mandating that. Those are ongoing discussions that our clinical leadership team, coupled with our epidemiologists and our operating teams will continue to look at, but that's not a position HCA is taking at this point in time.

Great. Once again, another labor question. Have you seen the need to offer bonuses, sign-on bonuses to attract personnel as a result of the environment we're in right now?

I have not heard of any wide-scale sign-on bonuses. It may be occurring from market to market on some specific job classes, but nothing that I've heard system-wide on there. We do provide some, what we call, shift bonuses for people to encourage to take shifts going forward. But I haven't heard of any wide-scale sign-on bonuses that we're paying. From time to time, there may be out there as you have to be responsive to the marketplace, but I haven't heard that in any large scale at this stage.

Right. Have you seen as a result of COVID more of a movement, increased movement from inpatient surgery to outpatient, seeing more of your surgeries on an outpatient basis over the last couple of quarters and what do you expect?

Well, I don't know if I can attribute that just to COVID. But we did see the outpatient surgery business begin to recover. That was the segment of our business that was affected early on because there were more nonemergent activity. And as people were deferring care, want to see how COVID surged, that was our outpatient surgeries declines were greater than our inpatient declines. So when COVID began to subside, we started to see the outpatient surgery volume return on there. So I don't know necessarily if that's COVID or not COVID. There had already been an evolution, if you will, of some cases' movement from an inpatient to hospital-based outpatient in the ASC. And our hospital-based outpatient -- hospital outpatient surgery activity was growing faster our inpatient. I think majority of that was the recovery of some of those deferred volume that occurred during the previous COVID surge. And we'll just have to see what the long-term effect that's going, going forward. I continue to believe there will be a natural migration in outpatient surgery, but it hasn't been at the compromise of our inpatient surgery. We are still seeing some inpatient surgery now. And so when this COVID surge hits, it's hard to really get a read because they come and go. But over the long run, we still think both our inpatient and outpatient surgical volume growth are important service lines we'll focus on.

Great. Have you seen -- are there any thoughts about the actual physical layout of facilities as a result of COVID? Things that you -- as you build new facilities or renovate, you may do differently, as a question regarding that.

No, Jim, I can't say really as a result of COVID that we've changed kind of our view of layout. We're always evolving that as we build new wings, new towers. We even have a couple of new hospitals, right? We built one outside of Denver. We have a Lake Nona facility that's opened up earlier this year. We've got a facility in South Florida that's opening up. So we're constantly looking at the appropriate layout. But I can't say that I've heard or seen COVID really influence our design and construction models and our techniques at this stage.

Great. Great. I think that's all we have in terms of questions.

Great.

Gentlemen, I really want to thank you. Thanks for participating. Thank you all very much, and we'll go into the next session after this.

All right. Good to see you, Jim. Thanks for your time this morning.

Thank you.

Take care.