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

Good morning, everybody. Thanks for joining us. I'm Gary Taylor, healthcare facilities and management analyst at Cowen. It's my pleasure to host HCA Healthcare. Most of you know, one of the leading health care services companies in the U.S. with more than 30 million annual patient encounters operating among other facilities, 182 hospitals, 125 freestanding surgery centers. So this morning, we have Chief Financial Officer, Bill Rutherford; and Head of Investor Relations, Frank Morgan, joining us and both looking super dapper. Thanks for joining us. Hope all is well in Nashville.

I thought maybe I'd start, Bill, with a big picture question. What sorts of changes in care delivery post-pandemic do you think are going to prove to be permanent? And I'm thinking about how we've seen changes in ER utilization, although a lot of that seems to be coming back, physician employment, how you guys are utilizing virtual care, et cetera. What are your thoughts on that?

Yes. Well, I think it's one still too early to call any permanent changes. I don't know if I see really any major structural changes. There are some areas on the margin like telehealth that you mentioned. Obviously, telehealth became important during the COVID areas. I think that telehealth may be here to stay, will be a component. It may not be as robust as it was during COVID as people are comfortable returning to a health care setting. I think maybe some of the lower acuity emergency room patterns were adjusted during COVID as maybe people stayed away from an emergency room or found an alternative setting to care. We'll need some time, I think, to see those permanent structures. My sense is they're mainly on the margin. Structurally, I don't know if we see any permanent changes. We believe there will be a continuing growing demand for health care, and we think the markets that we operate in will continue to have robust demand when we look at population, when we look at demand, when we look at the economic indicators, employment, on there. So we start with the demand curve and really delivery of care. I think there will be some adjustments. I think many health care providers found the utilization of technology. The need and utilization to interact with our patients in a much more digital format, telehealth may be an aspect of that, some other. So I think those will be here to stay and will, over time, be enhancements to the delivery system. But I'm not so sure those are material, permanent structural changes quite yet that I can call.

And the reduction in some of the lower acuity ER utilization, it looks in some of the industry data like ER visits really started sharply balancing off the lows in the last few months, but it's, I presume, some of that or maybe a lot of that is Omicron. But just in terms of lower acuity ER from a fully-loaded margin perspective, is that good for HCA that, that has gone away? Or was that a net negative impact?

I would say from an economic standpoint, it really had an immaterial impact. It was more an impact on the stats in ER visits. But as you know, during the course of '21, we were seeing growth in the higher acuity emergency room activity. And we were actually seeing our admissions through the emergency room increase. So the loss of that lower acuity for a period of time didn't have a material economic impact. I won't say it was necessarily positive, but it wasn't negative for us from an economic standpoint, and again, because the activity was really busy in the higher acuity side. And the impact is coming from your emissions through the ER. So being a -- I think we'll need some time to see this at return. Was it lower because they found alternative settings? Or was it lower because they decided to maybe wait out an issue that they were having because of the fear of moving into a health care setting with COVID prevalence? And when that dissipates, will that return to normal? So again, we'll need some -- just a little bit of time to see how that settles.

Talking about trends potentially recovering, surgical volumes, particularly inpatient surgical volumes have really tended to diminish when we've had COVID surges. I think initially, we're seeing similar sort of impact on outpatient surgery, but I think a couple of years into it, we got to the place where that was having less impact and was being managed better. So we heard -- Stryker was at our conference and said January was kind of weak, but exiting February, things have really started to pick up again. Is there any comment you can make on sort of current activity? Or if not, just sort of refresh us on what you're thinking about inpatient surgical over the course of '22?

Yes. As you know, I really can't comment on our current trends. We'll just have to wait to see how the quarter settles out and we'll share with you that when we give our quarter results. I can say, generally speaking, when we see surges in the past, and I can reflect back to first quarter of '21 and second quarter, where maybe some of that surgical volume was deferred either because people were staying away or we were managing capacity to make sure we have the staff and the capacity service. What we saw in the subsequent period is some recovery of that activity. So the second quarter of '21, we started to see some recovery of the volume that was deferred in the first quarter of '21. So that's the only kind of reference I can give you. We'll have to see, does that play out going forward? I think it's too early to call, and we'll share with you the detail that we see when we get first quarter results. I think over time, over a period, we believe, mostly, demand trends should return to the historical levels from there. And when we think about just the overall demand and our kind of strategies and initiatives, we think over time, we can return to our historical trends, which showed inpatient surgical growth probably in that 1% to 2% over a period of time. We've been in this time where it's been disruptive because we've gone through these surges. And as we've talked about on our year-end call, we really haven't experienced a normalized sustained period of time. So we'll have to see how long does that take to normalize or return back to that. But I think over time, we would expect to continue to see inpatient surgical demand in our networks, and just we'll see when does that materialize. Our outpatient surgical growth historically has been very strong. We continue to see opportunities to develop outpatient surgery settings and centers in our networks. We continue to have de novo projects that we settle, that we've developed. And then we see this move of our hospital-based outpatient surgical activity would recover relatively quickly after a COVID surge. So we'll have to see this Omicron surge. Do we see the same level of recovery that we saw in previous periods?

And then just following just on the outpatient -- hospital-based outpatient surgical side. Certainly seems like there was some shift or acceleration of -- a decade's long shift towards ASC, away from HOPD. How are you positioned to capture that shift with coverage, so to speak, of ASCs in your key markets? And do you think there's any reversal of some of the moves we've seen? Or do you think that just becomes a permanent part of the landscape?

Well, I think there's, as you know, there's been a long trend of migration patterns from an inpatient procedure to a hospital-based outpatient ASC, maybe even to physician clinic. I don't know if we see those trends materially changing. What we saw during COVID was orthopedics was an obvious one to move from an inpatient, mostly into a hospital outpatient and a little bit into an ASC levels on there. I would expect that migration to continue over some time, but we're positioned very well to meet that. We've got a robust surgery center network, over 150 surgery centers and GI centers. Our pipeline of development, as I mentioned a minute ago, is robust. Generally speaking, we've got -- it's a great tool for physician partnering and affiliation in there. So we believe we're very well positioned to capture that migration, if you will, that occurs. But I'll also say that we see the growth in the inpatient being able to backfill some of that. So even though you do take orthopedics, some of that move from an inpatient to outpatient. We see, net-net, the composite activity increase. And so I think, net-net, that becomes a positive trend for us over time.

Thanks. The last couple of years have had such interesting, unprecedented dynamics in some ways. But payer mix has generally improved for you. Certainly, when I think maybe the lower end of the payer mix where uninsured volumes have been lower, lack of Medicaid redeterminations have allowed that population to stay in place. We had enhanced ACA subsidies that really caused growth in the ACA populations, particularly in Texas, in Florida, and then there's been some relief fund for uninsured COVID patients, et cetera. How do you think about just kind of payer mix developing over the next couple of years? And I guess, particularly around uninsured.

It's a good question. And I do think that is one of the variables that we have to have some time to fully assess. I think generally speaking, we think payer mix can remain positive. You see the macros of the population growth, employment numbers, the economic indicators, generally -- our full access to contracts I think position us well to continue to meet, hopefully, a growing demand in the commercial segment. The mix has been benefited for all the reasons that you mentioned and the fact that the Medicare population during COVID was probably the population that stayed away from the setting when they could because of the vulnerability of that population. I think over time, that will begin to eventually return. And as long as returns without squeezing out or pushing out the commercial business, it's still a net-net positive. The uninsured trends have been benefited during COVID because of the HRSA reimbursement on there as an uninsured patient presented with COVID, there was coverage to them and they moved from an uninsured into a coverage area on there. As we talked about in our year-end call, we don't have full line of sight and how long that will continue, but our expectations is that coverage still won't be there. So that may result in some growth, statistically, of the uninsured. I don't think it has a material economic impact to us that we have size -- we talk about size and the year-over-year reimbursement change on there. But I think over a longer period of time, Gary, our belief at this stage is that we should return to historical patterns, both on mix and maybe even acuity. Clearly the 2 years of COVID interrupted that. It presents some variables about how the business returns and what will be the mix and acuity of that, but outside of those cyclical changes, we think over a period of time, we still see demand growing. We think we're positioned very well. We see the economic trends in the marketplace, generally being positive for us. The enrollment in the health insurance exchanges, as you mentioned, we think will again be a positive trend. So we try to take that longer view of those macros, and that tells us that hopefully, we can return to what was our pre-COVID kind of trends.

Shifting topics to a very detailed one, but just any update on the Texas directed payment program, DPP program? We've been doing our best to follow the letters that fly back and forth between CMS and Health and Human Services that get posted.

I've not heard any update since our year-end call on that status. And I know there's a lot of discussions going on between the state and the federal government. There was some legal activity, as I understand, going on between the 2. But I have not heard of any developments to that. I think we mentioned this in our year-end call that I don't think at this point, we would anticipate that being resolved in the first half of the year. That might move into the second half of the year. So now short answer is I don't have any updates since our year-end discussion on that.

We had a call with one of your nonprofit competitors in Dallas that expressed the view that, that funding was so important to the nonprofit hospitals across the state of Texas that they were really confident somehow some way that the funding -- whatever form, the funding stays in place. But I guess, effectively, if it takes that long, I mean that's just cash flow that is delayed for these nonprofits, right?

Yes. I think that's right. And we have fundamentally the same belief. It's such an important part of the aspect of health care delivery in Texas to think that you could just do away with that without jeopardizing many hospitals across the state. It seems like there will be a solution to that in some form or fashion. That's what we incorporated into our thinking. We're incorporating our guidance if that resumes, but likely will be the second half of the year. And you're right, the interim aspect of the cash flow, we can manage through that. If I was a smaller kind of stand-alone hospital, that would raise some concerns whether you can manage through that. But for us, we'll get through it. And hopefully, it will be resolved and we'll have some visibility into that soon.

Until that is resolved, that will show up in AR? Is there any other accrual bucket for government payments or anything else like that?

No, it won't show up in AR. We just will not recognize any of the revenue until we get an understanding that, that program gets approved going forward. So again, like I think we talked about in the fourth quarter, it has an impact and will have an impact to us going forward until we get visibility of it being approved.

Okay. I might have misunderstood. I was -- I thought you were saying that it -- or maybe you were assuming in the back half, it shows up...

It's in the back half, not in -- we will not accrue the revenue related to that until we have visibility that it is being approved. We don't expect that to happen until the back half, so that's why we'd not expect to see that in the first half. It's in the second half.

I'm going to go to the second most popular question of all time of late, talk about margins a little bit. So margins have gone up the last couple of years to -- my model only goes back 20 or 25 years, but I think occupancy hit. Certainly, for that period, hit all-time high occupancy, which creates, obviously, operating leverage in your business. You have guided for some margin compression in 2022. Where are you in terms of permanent cost reductions, incremental cost reductions? I know when the pandemic first hit, we were talking about Phase 1, Phase 2, Phase 3. And Phase 3 was if it really gets bad. So maybe just update us there. Now one time you talked about maybe rolling out centralized lab like you have in Florida. So are there other material -- well, permanent and/or any new material opportunities that you're looking at on the cost side?

No. It's a great question. Let me talk about that. First is there's a lot of variables that go into margin. There are a lot of variables.. When you think about the complexity of the revenue portfolio mix, security, coverage of fixed cost, a whole host of things. We do have a robust -- we call it a resiliency plan. We obviously initiated it first to COVID, which was really those short term and I think you labeled it fairly temporary cost reductions, things you could do immediately. But you know, over time, they bleed back into the system until we can launch what we call our Phase 2. Today, I would characterize our resiliency efforts in kind of 3 main channels. One is around just managing the current staffing and capacity environment. We have a number of initiatives to deal with the disruption of the labor market that around recruitment, retention, new models of care, can we supplement our nurses and the like, and come back and share with you a little bit more detail. We have a whole activity around just managing labor and capacity piece, and that's an important, obviously, aspect with the labor market dynamics everybody is dealing with. The second area is really around longer-term resiliency efforts that I'll largely highlight as shared service initiatives that we had underway for some functional areas. And you mentioned lab. We are continuing our lab rollout. As you know, we had operated and consolidated a lab operation in South Florida, and we've used that model to begin to roll it out to all of our other major markets across the company. It's probably a 2- or 3-year journey, and we're well into that. And that is continuing to roll through the company. And that's proven to be beneficial when you think about -- if you've got -- we're operating 8 to 9 hospitals in a market instead of having 8 to 9 independent labs. We have centralized lab operations, and that brings some efficiency, better outcomes, better turnaround times, has proven to be an effective model. We have other areas that we're exploring such as environmental services, plant operation support, food and nutrition, equipment management and the like that are also part of that Phase 2 kind of resiliency efforts. We're looking at some of our other support areas, for example, like case management, rolling that into a common organizational structure. And that brings efficiency -- cost efficiency. It brings, I think, more consistent application and hopefully better outcomes at the end of that. And all of those are underway and I think provide a buffer to any other kind of market uncertainties we have or even inflationary pressures you may have. And then the third channel of our cost management or resiliency is an effort we've had over time, but we're really trying to accelerate. We call it our -- using our data analytics and technology to benchmark ourselves against each other, really just think about reducing variation of key areas where we can look at cost per unit of measure, cost per patient day, cost per surgical case, cost per X. And we have a whole effort around trying to identify where do we have opportunity, transport best practices across the enterprise. And so those 3 main channels are really key kind of resiliency, cost efficiency efforts we have underway. We've always had those at some level, but we're trying to really put formalized structure, effort and project management so that we can highlight those or utilize those to use as a buffer of any other inflationary cost pressures or disruptions that we might have in the marketplace. That's been a bit of important part of HCA. And I think because we do that, we have -- historically, if you look at your long-term model, I think, operated at very reasonable margins for the company. They have been stepped up during COVID because of the mix and the acuity and some of those COVID support payments we've talked about, and we'll have to see how those play out going forward. We know or we believe some of the COVID support payments like the DRG add-ons, some of the HRSA reimbursements. The impact of the delay sequestration, as we talked about on our year-end call, we don't have full line of sight, but we're not anticipating those to continue. So that will have an impact, and that's a key driver of why we'll see some margin. And then ultimately, we'll have to see what the business returning, at least in the near term, what is the mix and acuity of that in the -- but again, I think we can aim to deliver reasonable margins going forward.

So I think you should give me a gold star at the 22-minute mark before I ask the question about labor cost. So we're going to top priority question that I get. I guess the question is -- I have a couple of questions. One, kind of all-in, what you're thinking about this year, whether -- I don't know if you best measure it cost per FTE or patient day or per hours worked or have you looked at it like sort of what that step-up in inflation looks like to HCA? But then also just when we think about 3 waves of COVID through 2 years, particularly how intense that Omicron wave was and how transmissible and how many employees were on quarantine, I just sit here and think how could we not have peaked contract labor, shift differentials, overtime, et cetera, et cetera, et cetera? And 3 to 6 months from now, is there really a far more -- not back to where we were, but maybe more benign sort of projection in terms of labor? So I guess, one, kind of walk through inflation. And two, just respond to my comments.

Well, I think the comments are right on. We would hope that if the COVID surges, they don't materialize anymore, we get to a normal level. the disruption that occurred in the labor market, we would hope would normalize. I mean when you go back to '21, there's no question the labor market was disrupted in health care significantly. A lot of variables that we don't need to repeat on that. But all of it, we believe it was tied to the surges that we had and that there were a lot of forces that were pulling nurses from an employed status, moving into contract pools. And we had to purchase these contract labor pools where we had to launch, like you said, shift differentials or other measures to ensure that we have the labor staff to serve the demand that we were seeing for the COVID. It was a responsibility we have. And then you just have the fundamental inflationary labor pressure. And we had a bit of time for at least a decade, we have been in a relatively low inflationary environment. We do look at it as the cost per FTE number. And so as we go into '22, there are going to be some variables, right? We hope and we believe that as the marketplace begins to normalize, we won't have as much premium labor costs that we had going forward, that we had in '21 as we can hopefully decrease the utilization of contract labor, see declines in the cost of that utilization. We'll have to have as many of those other premium pay programs. As those begin to decline, that can help offset what may be wage inflationary pressure for your employee base. And net-net, we can manage that to a reasonable level. And I think in the historical trend, but we think we can manage it within the context of our revenue portfolio, maybe 3% to 3.5% on a cost per FTE where before we were in 2%, 2.5%. But that's doable within the context of our revenue. But that's a combination of reducing the premium labor and trying to deal with the market realities that are out there. And then I overlay that, as I mentioned earlier, we have a host of initiatives around our staffing and capacity so that we can try to make sure that the labor market doesn't become a limiter for us to be able to serve what we -- hopefully will see a growing demand. And that involves enhancing our recruitment effort, enhancing retention efforts so we can reduce the attrition that we saw during COVID. And hopefully, as the marketplace settles, so will attrition. And then looking at new models of care, can we support our nurses with patient care techs? Can we utilize paramedics in the emergency room? Can we utilize other service lines to take the burden off the nurses? So that helps ease the dynamic and even the cost burden that may occur over time. So a lot of variables that will go into play. We have a number of initiatives inside. We've made some projections going forward in '22, I think we talked about in our year-end call. I think the first half of the year, we might see some of those pressures continue. But the second half, to your question, we would expect, as long as the market trends play out like we think may, it will begin to -- I don't if normalize is the right word, but settle, and it won't be as disrupted as we saw during the last half of '21.

I know '23 is a long way away, but when we think about '22, some of the headwinds in terms of government funding going away and occupancy perhaps normalizing and the higher labor costs, et cetera. Do you think '23 and '24, it's a return to the growth algorithm, that kind of long-term growth algorithm that you've talked about for HCA? I mean, from this distance? Or are there other -- anything else sort of obvious that still is potentially quite different heading into '23?

Well, it is a long time away. And I can't make predictions that far away, but how I would answer that is I think kind of the basic principles we've built HCA on, I think, will continue. One, we see growing demand for health care. All of our historical trends and most all of the projections will suggest we'll still see growing demand for health care, and we operate in what we view as very attractive health care markets out there. So that's the overlay. So I don't know if we see anything right now that would tell us that we don't have those [ boys ], we believe over time. Now COVID, in the past 2 years, has disrupted that. But when we go forward, we believe we'll return to those historical demand metrics in there. We believe that HCA networks are well positioned to meet that demand. And we're investing in our networks to continue, and we believe with that organic demand plus our ability to, I think, operate highly effective network systems, we can continue to capture share. So I would say from a very broad view, yes, those metrics, right now, we think still are relevant for us. And many of the things we're doing to build out our networks, to invest, to look at opportunities to grow are centered around some of those principles. Now underneath that, what becomes the mix? What becomes the acuity? How will that evolve going forward? I think, generally speaking, we see hopefully those trends return to historical norms as well. They've been interrupted, as we talked about. We've seen favorable mix, favorable acuity. Some of those stayed away. They'll eventual return, and I think that will return. So broadly speaking, yes, I would think at this point, the profile going forward should be relatively consistent with our historical profile. But I'll [ answer ] that. We'll need time to see how the market plays in full. We haven't had a normalized period of time for 2 years since COVID, and we're going to need some period of time to fully assess and judge that. But right now, I think, broadly speaking, that's how we're thinking about it.

Just maybe 30 seconds left here. We were talking earlier. It sounds like on Medicare heading into '23, you're thinking you're probably staying in the 2s and not getting a substantial step up. What about on the commercial side? We don't have much time, but how many contracts are multiyear? How much opportunity is there just in the next year or 2 to get some of the higher labor cost trend reflected?

Well, there's some. I mean, we always have those discussions with our payers. You generally have to wait for those contract cycles coming due, coming open. And as we've talked about, we're mostly contracted for this year, so that's likely a next year event. I can't tell you the exact number of contracts, but we would, on average, probably be 2-year contract cycles or some 3s or some 1s, but 2 would be an average. So I think that's into '23. We try to introduce those conversations in an interim. Imagine those are met with varying degrees of receptivity in terms of our inflationary pressures and giving some acknowledgment or recognition of that. So that largely will take some time for us to address going forward, and we'll just have to see how that does play out in those discussions in the coming months and years.

Great. Well, thanks, everybody, for tuning in. We're out of time. So I'll leave it there. Everybody, have a great afternoon.

Thank you, Gary. Good to see you. Thanks, everyone.

Thank you. Bye.