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

Good morning, everyone. This is Whit Mayo. I cover Health Care Facilities and Managed Care at SVB Leerink. It's my pleasure to have the team from HCA here with us today. Representing the company is the Chief Executive Officer, Sam Hazen; Chief Financial Officer, Bill Rutherford; and for his last appearance at my conference, Mark Kimbrough. I think I started covering HCA 18, 19 years ago. I think this year, Mark has run what I think is one of the most effective IR teams and overall strategy in the industry. Importantly, he's been a remarkable ambassador of the HCA culture and a very good friend to a lot of us. So we'll really miss him. I think today, he just said this is his last day. So I'm thankful that he stuck it out to be at my conference, but also very excited to have Frank Morgan slide into the IR role. So welcome, everyone, and thanks again.

Maybe just to start, Sam or Bill, we get a lot of questions around some of the components inside of your '22 guidance, which implies that COVID admissions may decline by about 50%, and that places probably non-COVID admits growing 7%. So I think the question that I'm really asking is when you look at the underlying characteristics of non-COVID today, what stands out to you when you compare this to 2019, whether it's the acuity complexity, just any underlying themes would be helpful.

Let me start, and Bill can fill in some blanks if I leave some open. Whit, thank you for hosting us here today. First and foremost, our belief is that, number one, the markets that we serve are really in a healthy situation when it comes to overall macro factors that we think influence demand. So population growth is there. Competitive landscape really is unchanged. And we're in a situation where we got that as a natural lift, if you will, in demand. And that's the starting point. The second thing that we believe, at this particular point in time is, there was so much disruption over the last 2 years with sort of patterns of care. And I said this on our leadership call that we have with our teams just last week is we did not -- we have not had 3 straight months work of consistent business transfer. We were fully open for surgical care. We were fully open for transfers or anything of that nature. And so it's our belief some of this is coming from our physicians, that there are a lot of demand that's been on the sidelines for a host of reasons. People were just uncertain, the capacity in the market was constrained because of COVID, and we think that's going to position itself for recovery post-Omicron variant. So that's the second thing, I would tell you. The third thing is we think at least in '22, the subsidies that have been provided by the federal government for individuals to gain coverage in the exchanges is a positive in the short run, both from a payer mix standpoint as well as a demand standpoint and that people may know that they are short cycled with subsidies and therefore, accelerate some of their decision-making. So we think those 3 factors, macros in our market, deferred demand and the support for coverage is going to create an opportunity and a rebound in demand on non-COVID. The other thing I would say, Whit, is especially in this last surge, the mix of business was maybe not as discrete as the Delta variant. It was obvious to us that if a patient was in for COVID during the Delta variant, it was because of COVID. In the Omicron variant, there was a little bit more co-mingling. In other words, somebody comes in, we test them, and we find out they're positive. And so there was a little bit of a mix. So I think when you start looking at non-COVID versus COVID, you have to moderate a little bit of that in this last surge that we went through and we experienced somewhat in the fourth quarter and a little bit in this first quarter coming out of the gate in '22. So those are the factors. Acuity, again, don't know how to judge the deferred demand and how acute that would be. I think it's reasonable to assume that if people have put off certain things that when they reenter the health care system, they're likely to have a little bit more of an acute scenario around whatever their condition was and what they maybe had, heading into the pandemic. And obviously, our strategy, as you know, has been built around creating a more complex service offering, advancing acuity inside of our business model, and that's been a very productive agenda for us, and it's an agenda that we continue to push through to try to find additional ways to have more capacity in those areas.

Are there any specialties that stand out or service lines where you think we may see stronger demand in '22? I try to think of, is it ortho? Is it cardiology? Oncology? Any signs that as you look at the data that you have internally that gives you increased confidence in this recovery or deferral of care?

I don't know if I have an answer to that specifically. I mean anecdotally, I've heard there's some cancer diagnosis that probably were way off in 2020 that could possibly deliver some demand down the road. Our cardiology business has been choppy because of the ups and downs, as I mentioned, throughout the last 2 years. I think what's important with -- when you think about our company is no one service line produces any more than 15% of the revenue of the company. And that diversification underneath our portfolio of markets, which is diversified is a service mix and a revenue mix underneath, that is fairly diverse as well. And so even if oncology is depressed during the past 2 years and rebounds, the weighted influence of that is going to be modest. And so our belief is that across a lot of these chronic conditions, we're going to see a natural lift, maybe a little more in one category than another. But across our full revenue mix, we don't have anything that stands out, that's going to influence the overall in any significant way.

Yes. And maybe just a follow-up on that. Just looking at your inpatient surgeries, they've been more depressed than some of the other volume metrics makes sense to us. How do you think about the recovery in inpatient surgeries? And I mean, we know the birth trends remain relatively strong. You get some pretty easy comparisons and that's the largest reason for inpatient surgeries with C-sections. But just any thoughts about just how that -- the slope of inpatient surgeries may trend this year?

Bill, you want to answer that?

Well, I think we know or believe that the inpatient surgery was impacted by the service. And obviously, as we were managing the capacity and maybe some of the elective care, the non-emergency care or surgical-related. We think that some of that deferred care that will return itself, some of the general surgery activity, some of those things that could be scheduled in advance. So we expect to see continuing trends in that inpatient surgical line as we go through the year. And again, I think most of what we saw in '21 was related to the COVID surges that we experienced throughout the year.

We obviously had some dislocation of inpatient surgery that we think is more permanent. And clearly, orthopedics, and total joints have been over the last 2 years or so, migrating naturally to outpatient environments because of better pain management, some Medicare reimbursement rules and so forth. We don't see that recovering with entirely, but we've absorbed that in many respects. And we continue to grow our total joints as a whole. And historically, we've had other categories of surgery that have migrated from inpatient to outpatient laparoscopic surgery is a classic example, where it's now predominantly outpatient. Again, we've grown our robotics platform significantly and absorbed that transition from inpatient laparoscopic to outpatient robotics and added to our surgeon supply. If you want to look at it that way, where we have more surgeons operating in our facilities as a result of our transition there. And that's what we're trying to achieve inside of our orthopedic platform. And we also have that -- I'll let this firetruck go by. We also have that with some areas of spine care and so forth. But there's some natural transitions that happen as technology gets better, as pain management gets better and so forth. But again, a lot of our acuity efforts to improve the offerings and increase the complexity of offerings can generate inpatient surgeries to backfill some of that. We've done that in cardiovascular care. We're doing it in burn care. We're opening new burn centers. And so we continue to evolve. And again, because we're in these great markets that are growing, it allows us to take a hospital that is a secondary care service offering hospital add tertiary care to possibly complement our network more. And so we build into that growth, this complexity as much as we build in capacity.

Helpful. Another question that we feel, frequently from investors is, when we look at your margin profile today, it's obviously higher than where it was before the pandemic. A lot of the government stimulus is going to go away and we'll bring that down some, which is natural. But the underlying margin is certainly higher than 2019. On the other side of the pandemic, why would HCA not revert back to a 2019 level? I mean I have my views, but Bill, I'd like to hear yours.

Well, I mean, as you know, and as Sam alluded to, our revenue model is really dynamic. And there's obviously a lot of variables that go into our margin production. We've obviously seen very favorable margin trends recently, driven by the acuity, payer mix, some of the HRSA and the COVID support payments on there. Generally speaking, we believe that we're going to continue to see favorable acuity trends going forward. We think the payer mix will continue to be favorable as we're in a full employment model. And as we see the growth in the health insurance exchanges and some of that volume return on there. So we'll have to wait to see how that unfolds. In addition, we have a number of efficiency initiatives that we continue to drive through our resiliency programs that we fully anticipate those to continue to add value for us going forward. So all of those factors go into our thinking around margins. Even our '19 levels were very attractive margins. We hover between 19% and 20%, some periods higher, some periods lower. So we think the margin profile of HCA could still be very strong relative to the industry, and we're continuing to drive efficiencies where we can. But mostly the acuity and mix, we expect to continue to be favorable, maybe not quite as strong as the year-over-year growth we saw during the COVID, but we believe we can reach a step, and we can maintain that going forward.

Obviously, we're in an uncertain period with 2 factors that in the short run could be pressure points for us on that. And we're coming out of a massive disruption of the labor market. Again, we haven't had 3 months' worth of normal business trends. So it's difficult to judge how that plays out if we have no more COVID surges. So we're making some judgments around that. And then the inflationary pressures in some other categories, we've got to work our way through as well. But I think to Bill's point, we have a lot of components of our strategy, Whit, that we think enhance margins. We have a technology agenda that we're investing in, that we think have longer run potentials to highlight opportunities for better efficiencies and margin expansion, less variation across the company. We still have a lot of variation. As good as our facilities perform, we still see a lot of embedded opportunities for better performance clinically, better performance from an efficiency standpoint and so forth, capacity management, you name it. And so benchmarking is part of our resiliency agenda, and we're challenging ourselves to be even more transparent inside of the HCA economy, as we call it, to unlock a lot of embedded value. And technology is going to be a piece of that benchmarking and better benchmarking is going to be a piece of that. The care transformation and innovation team that we've stood up is going to be a part of that. So in addition to these topline strategic agenda items that Bill alluded to, including our resiliency, we're supporting better performance, hopefully better margins with technology, care transformation and more transparency around variation in our company.

Got it. Maybe just since you mentioned labor, just to maybe unpack that a little bit. Do you think that there was anything unique or different that HCA did in response to some of the pain points on labor in 2021? I mean my sense is that perhaps you were a little bit more responsive injecting some merit pay into the field to address the obvious challenges. But I guess, I'm looking for like anything that you feel like you did differently than perhaps the industry?

Yes. I don't know that I could say anything differently than others. It's hard to sort of synthesize others because we have so many different competitors up from one market to the other, which, again, is an advantage for us and that we don't compete against the same structured system in hardly any market, and we see that as opportunity mostly. We have been very aggressive in making sure that our compensation programs are competitive. Most recent data we have suggest that we are. So the adjustments we put in for our employees, for compensation and certain benefit programs we've done in the middle part of last year, maybe more in the third quarter type of area, if I remember correctly. We think those are on the mark at this point. We've tried to support our employees with different care models and other approaches to give them relief because we're running at a fairly productive level. And so I don't know exactly what our competitors are doing on that front, Whit. But we are trying to support our employees extend their capacity, if you will, with different support models, some technology solutions that we can provide pretty quickly. That's been helpful. But here again, the surges have been incredibly disruptive to normal patterns in the labor market. An example of that is the state of Texas and the State of Iowa, in the Omicron variant, decided to stand up nursing resources for both states. They did it at really outsized rates supported by federal COVID monies. And that creates a short-run disruption for us because our nurses can go wow, I can go get this incredible wage in the short run. And so if we don't have surges, and we're not thinking we're going to have any more surges, and that's our belief as we go into '22, we'll still take care of COVID patients, as we've indicated, but we're not anticipating another surge. We think that's going to slow down some of the madness that's taking place and give us a sense of whether or not the efforts that we put forth, compensation program, care model support, capacity management is really taking hold and starting to stem some of the turnover pressure that we've experienced over the past couple of years. And it really started with the holiday surge at the end of '20 and carry through the Delta variant and so forth. Long term, we're very excited about our agenda. We think we have a unique model with our Galen School of Nursing agenda, our clinical education programs that we're putting forth, opportunities to grow and so forth in our company. And so as that particular component takes hold, hopefully, that merges with some of the short-term items that we put forth, and we're maybe a little bit more competitive in the labor market than we are today. That's exciting to us, and we think it's differentiated. And as I've told our teams, we have to now compete for labor just as aggressively as we compete for physicians and patients. And so we're trying to turn up our game in our recruiting, in the applicant process, in the hiring and onboarding process, all of that is being done under what I call the HCA way where we're trying to really perform at a high level and at an efficient level and then let that merge into these other programs that I mentioned. So is that different than our competitors? I don't know yet. My sense is we're executing on it maybe a little bit differently and hopefully better. And we'll start to see some yield from it maybe as we move through the middle part of this year.

Maybe the only thing I would call out maybe is our HealthTrust Workforce Solutions, our internal staffage has really been an important asset forces. We've helped the market navigate this as they can be a centralizing and coordinating enterprise, to not only help meet where we -- and deliver staff where it's needed based on the service. So we do have a centralized or a coordinated effort that allows us to kind of manage the resources where there highest needs are across the organization.

Maybe just a follow-up on that. I know that I've got a question here, and I think I prepped you guys with this that, is there anything inside of HealthTrust that is particularly exciting to you today in terms of a new initiative or new strategy that we've talked about some of the pharmacy initiatives over the past few years, but wasn't sure if there's anything new that you get particularly excited about?

Well, we have a lot going on underneath HealthTrust, with the core being managing our core supply chain operations and managing our supply expense. So there's a lot of activity in there to help manage through that. And I think that really shown itself during the pandemic and allowed our facilities to maintain adequate levels of PPE and acquire supplies and especially in a tightening supply chain. So they're really focused on the core supply chain ops. We have a number of initiatives underneath HealthTrust that are part of our resiliency efforts, some of the benchmarking efforts that Sam spoke about is around supply utilization, commodity, pharmacy, medical device, trying to identify where there might be opportunities by benchmarking individual facilities against ourselves. We have a number of other resiliency initiatives under HealthTrust that are in our consolidation of shared services that we're exploring, things around food and nutrition, environmental services, playing ops, equipment management. We're trying to look at new -- there's some things we can internalize with equipment management and equipment logistics as we utilize equipment across the marketplace. So again, a number of initiatives underneath HealthTrust that we continue to be excited about and adding value to HCI.

And that goes back to this idea, there's a lot of embedded opportunities for us. Bill just highlighted 4 or 5 things that surfaced throughout the pandemic as possible operational improvement categories for the company. And so that's in front of us as potential, Whit, and we're working our way through that.

Yes. One of the developments that's occurred in the last few months that caught my attention was the decision to rebrand the Florida market, I think, as HCA Florida. And as I sort of think about how you're configured across the state of material presence, right? I think you can hit an HCA hospital within like a 30-mile radius of almost any city in the state. What are the objectives there? What kind of drove this decision? Just any insight into what you think you can accomplish?

So we've done focus groups with our patients, with our employees and with our physicians. And all 3 constituencies believe that being part of a larger health care system that's connected with different facility offerings, geographic offerings and service offerings is an advantage. And in Florida, not really different than Houston. We had historically used local branding. Our business model is to build out a very comprehensive provider system in whatever community we decide to operate in. So we have hospitals at the core, and then we have a lot of ambulatory facilities and affiliate relationships, telemedicine relationships and so forth that create this ecosystem of health care network that in Florida was disparate, nothing connected. So there were inefficiencies in that. There were suboptimization in that, and we felt that we had a tremendous opportunity to bring it all together and let it be a representation of what we've built in the state. The more effective at outwardly facing to the patient population and then deliver on the promise. And so I think from that standpoint, it's really how we've evolved our business model. And this idea of being the provider system of choice, having a full array of facility offerings. And I think I mentioned this on the fourth quarter call, we grew our outpatient network 14% this past year, the fastest growth we've ever had, where we have over 2,200 outpatient facilities supporting the 180-some hospitals. So a little more than 12:1. Now I anticipate that, that will grow significantly over the next 5 to 7 years. I don't know where it winds up. But we're well north of 12:1 right now with the development that we did this past year. So connecting those dots is important. So if an urgent care center is a stand-alone, a patient, at least in our focus groups, indicates to us that they don't view that as having as high-quality offerings as one that's connected to a larger system. So we have other markets where we had previously branded under a local brand. In Dallas, for example, Medical City, we had a standout hospital in Medical City, Dallas, and when we were earlier in our branding thinking, we used and leveraged that brand name to brand the whole DFW market. So everything is connected to Medical City health care. One day, we may put HCA in front of that. We don't know yet. In Houston was a lot like Florida. And it was felt amongst our physicians, our employees and our community boards, that we should go ahead and use the HCA name, which was the best name because we didn't have an individual facility in Houston that we felt had enough cache that we could go with that. And so that's been our model, Whit, but it's important, especially in the local market that we have a connected system, outwardly facing and inwardly facing for our employees, our physicians and really our strategy. And I think that's been really a productive effort for us in both Houston and Dallas, and it's not just this. But since we branded in Dallas-Fort Worth, we've moved from #3 to approaching #1. And that's in the fastest and biggest market that we serve, DFW. In Houston, since branding, not only because branding, we obviously did some acquisitions. We've moved to #1 in market share in Houston. In the state of Florida, we're clearly #1 with the offerings we have. We have over 50 facilities. We have a tremendous network of outpatient facilities, and it's a very dense state by comparison to Texas, which is Houston and Dallas don't necessarily get along. And so we were able to take that density of people, the density of our networks and put it all together, and hopefully, this will yield the value that we've seen in other markets.

Yes. That's helpful. Can we spend just a minute on sort of the physician engagement strategy? Where are we in terms of employment, nonemployment? And we had Dr. Cuffe who generously sat on a panel with us on Monday talking about the omnichannel approach that HCA has around physician access points, urgent care, et cetera. But I guess I'm trying to think more broadly how the strategy has evolved today versus a few years ago?

Well, I don't know that it's that much different than a few years ago. I think, again, we have a multifaceted approach to the physician community. We have 50,000 physicians who are on active medical staff at our hospitals. And there's a lot of different opinions about what they need to be successful. Some want to be employed, some want to be in a contract relationship, some want to just be self-employed, if you will, and affiliated with us. So we have to morph our response to the physician marketplace depending on, really, the individual group or maybe even an individual physician. And so we pulled it up a little bit, Whit, and said, okay, what's in common in the physician world? They want to have voice and what goes on in our facilities. So how do we facilitate giving them voice? We have leadership positions. We have advisory panels, and we have an army of people who interact with them on an individual basis to say, "hey, I need this piece of equipment" or "I need to schedule on Tuesdays, not Thursday, can you help me?" And we try to solve those problems for them. That's the first thing they want. The second thing they want is clinical capabilities, good nursing, good technology, good subspecialty support, good information flow. And again, we're advancing specific agendas to satisfy the larger audience of physicians. The third thing they want is, I call it capacity. They want more time in their day. They want to go play golf, they want to go fishing or they want to do more procedures. And so how can we create a more efficient offering for them in how we manage their patients, how we manage their time and so forth. And then finally, they want to hitch their wagon to somebody that can help them grow their practice. And so we have to demonstrate to them how our network can feed their practice. How they can grow with the investments that we're making with our capital strategies and so forth. And I think with our market share going from 23% in 2011 to 28% in the middle of this pandemic, there is a pattern of growth broadly across our markets that resonates with the medical community. Underneath, again, all that is a lot of different alignment mechanisms. And some of that is driven by capitation in some markets. Some of it is driven by a subspecialty like orthopedics or robotics like we talked about. So we have to really be nuanced in our approach. And there's not just all one size HCA fits all physician strategy. And our view, fundamentally, is that our physicians are a core customer of our company. And so we're responding to them in a way that is meeting our customers' expectations, producing the omnichannel that Mike mentioned and growing the headcount of physicians who are attached to our facilities. And so investments in ASCs are part of that. Again, that's just part of the multifaceted approach that we have. That's probably going to yield, if I look out 5 years, more employment than today, but we've been on a trend of more employment. Our graduate medical education program will play a part in our physician agenda over the next 5 to 7 years and help us supply our own physicians in some cases. So we have a lot of things going on, and we're very focused on this component of our provider system, but it has to be nuanced.

Got it. With that, we are out of time. I could spend another 2 hours throwing questions at you guys, but I really appreciate you joining us today. This was incredibly helpful. Mark, I hope to talk to you soon. Sam, Bill, Frank, thanks for joining us.

All right. Thank you, Whit.

Thank you.

Thank you, Whit.

Thanks guys.