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

Good morning. Welcome to Day 1 of Oppenheimer's 32nd Annual Healthcare Conference. My name is Michael Wiederhorn, I'm the health care services analyst. Today, we're hosting each HCA. We have Chief Financial Officer, Bill Rutherford; and Investor -- VP of Investor Relations, Frank Morgan. Welcome. Thanks for you guys for attending. And hopefully, next year, we'll be back in person. Hopefully, this will be one of the virtual meetings that we do. We're doing fireside here. Also for the audience, there should be a Q&A portal in the top-right corner to submit questions if you desire.

So I'll open up with kind of a general question, just in terms of trends, post-Omicron. Can you kind of -- you kind of tell us where you are right now, what you're seeing in terms of utilization trends as we come out of Omicron?

Yes. Well, first, good morning Mike, good to be with you. Looking forward to the discussion. I can't give you too much detail within the quarter, but no question we're beyond the Omicron surge. And as we talked about in our year-end call, we were seeing the surge in January, and we were beginning to see the back end of that. And clearly, we are on the back end of that period of time, and so we're going to go through the year trying to manage through kind of different levels. We anticipate to serve COVID throughout all of '22. We are hopeful that the surges that we've experienced over the past 12 to 18 months will dissipate, and we'll get into a steady level. And then hopefully, we believe that the business will begin to return to somewhat normal patterns after that.

Okay. So as you kind of come out of COVID here, obviously, you've been seeing a shift to higher acuity as occurred during the pandemic. Do you see that returning to historical levels? Or do you think this is a permanent shift going forward? So how should we think about the business from that perspective?

Well, there -- no question. When you look at the past COVID period of time, we saw favorable trends in payer mix and favorable trends in acuity. And I think there were some COVID-related reasons for that. On the payer mix, we saw the Medicare population largely was a population that maybe stayed away from health care setting due to the vulnerability of that population. And then the acuity that we serve, we're seeing higher-acuity patients largely because the lower-acuity activity was staying away or being deferred for a period of time. So that left us with a pretty good dynamic. So in a post-COVID surge environment, whether those same dynamics at the same level occur, we'll have to see. As we step back, we believe kind of the macro indicators we look at are generally still positive to both of those sides. We see good employment in our markets. We see good population growth, really good economic indicators. As you know, good exchanges in the health insurance -- good enrollment in the health insurance exchanges. So all of that, I think, would portend that we could still see growth in the commercial segment. And they're -- it may not be at the same level of year-over-year changes we saw during COVID because of those COVID-related dynamics. And on the acuity side, many of our strategies and efforts are still targeted at growing higher-acuity services, even though we may see a return and likely we'll see a return of those lower-acuity activity that may have been deferred or stayed away from [ near ] time return that we'll still be able to serve a higher-acuity population over time. So again, I think macros over time is our belief. We'll return to historical trends. We're not exactly sure when those will materialize or maybe some of the cycle periods that we have to go through, but over the long run, we think the macros are still conducive to kind of how we position the company going forward. We see good demand in our markets over time with population growth the economic indicator. We believe the HCA networks are positioned well to be able to serve that demand. We're investing in capital programs. We're investing in clinical programs that I think will position us well to meet that demand and hopefully continue to see growth going forward. But again, we haven't had a normal period of time to judge exactly how that market will return. So there might be some choppiness to how we turn, but over the long run, we still believe that the fundamentals that we've historically seen will return over time.

And how should we -- obviously, margins have been moved up because of the payer mix and the equity. Should we think that will normalize, going back to prepandemic levels? Or do you think this is something that's sustainable going forward?

Well, again, that's something we will have to see. I think our planning assumption is we've kind of stepped up, and we can maintain that. We may not see the same level of growth we saw over the past 12 to 18 months, but we should be able to maintain, and our planning assumption is we will be able to maintain the level we've stepped up to. It just may not grow at the same level because you won't have those COVID-related dynamics still influencing that, but we should be able to maintain it. And again, depending on what indicator you look like, for example, mix. We may see the Medicare population return, so it may change the mix numbers. But as long as we can continue to grow the commercial segment, those are positive indicators for us. In the acuity indicators, we may see some of the lower-acuity business return, but as long as we continue to maintain to serve the higher acuity, those are still positive indicators for us.

Okay. Also, I mean, obviously, during COVID, we've seen a shift to outpatient. And how do you think your investments are positioning you within this at this point in time? And how should we think about that in terms of the mix of the business going forward as well in the beginning?

Well, I think as you know, we invested significantly in building out our network, so building out are outpatient sites of care and other sites of care. I think we reported on our year-end call during '21, we saw almost a 14% increase in our development of sites of care in our outpatient setting. That includes urgent cares. That includes a robust pipeline for ambulatory surgery centers, includes a pipeline around freestanding EDs. So we think we're positioned very well to capture that natural migration that occurs from inpatient to outpatient. And we've seen that, and we're investing in that development at a pretty good pace. I don't know if the pace of end-out migration is that dramatically different than it's historically been. There were some nuances during COVID just because of trying to manage capacity. We did see some surgical cases move from in to out. And so I don't know if that's accelerating at any level, but we think there's just a natural migration pattern that occurs, and we're well-positioned to capture that. Many of the outpatient migration that we did see move from a hospital-based inpatient to a hospital-based outpatient. So obviously, we're prepared to serve that. And then if it moves into a surgery center or even some of the emergency room activity that may have moved to urgent care, we're well-positioned in the urgent care side, but we did an acquisition late in the year. In South Florida, we're up to close to 240 urgent care centers. We see a continued growth of that pipeline. I think we have close to a little over 30 freestanding EDs in our development pipeline. And we have, I think, a pretty good pipeline around ambulatory surgery development, both on the acquisition as well as de novo. So that's an area we continue to be focused on is building out the network that gives more access points for patients, expand our geographic reach. It allows us to keep patients within the HCA system of care. So that's something we are -- we'll continue to be focused on.

Okay. Since you've been -- you mentioned about capital and investments. Your balance sheet is as clean as it's ever been. Can you talk about your updated capital deployment priorities? I think you were kind of integrating there. And touch on your capital in flight and how that might have been affected by the turmoil of the last 2 years -- last few years.

Yes. So I mean, our priorities remain the same. I think overall, our allocation of capital remains fairly consistent. Our first priority is to invest internal capital to meet what we view is growing demand for health care. We stepped that up in '21. We'll step that up to approximately $4.2 billion in '22, and that's a sign that we see opportunities to continue to deploy capital to grow. That capital deployment, the growth component of that, obviously, there's a routine component of that, it's in around building inpatient capacity. We had 2 new hospitals open up in '21. We've announced, I think, 8 new hospitals in Florida and Texas in there. So -- and we've got inpatient expansions in a lot of our markets. The other aspect of our capital is around network development that I talked about. And then the third area is around program value. We're investing in our service lines of program. We may be expanding neonatal intensive care units, surgical suites, cardiac cath capabilities and the like. So we took a little pause in '20 where we had to throttle down our capital spend, but we saw that come back online in '21 and '22. We're really back to kind of pre-COVID capital levels. After that, our priority is to maintain a balance sheet with enough flexibility to execute on strategic acquisitions if they materialize. And as you mentioned, the balance sheet is one of the strongest positions that has been relative to our targeted leverage ratio. And then after that, looking at what is the most appropriate use of our remaining free cash flow, we are a dividend payer. We grew the dividend. And as we talked about before, we're executing on a share repurchase program. Very comparable to the enhanced program that we executed on in '21. And that's really a reflection of the cash flow that the company generates and utilizing some of the balance sheet capacity that we have. So again, I think that's relatively consistent. Internal capital, maintained the balance sheet in a strong role, reflect the dividend nature of the company and then utilize the rest to basically execute our share repurchase program.

Okay. So when we think about M&A, the pipeline, what are you most focused on? How is the pipeline now? And how should we think about that relative to doing de novo double projects that you having going right now? And just discuss the strategy in terms of the economics of build versus buy?

Well, I look at the M&A pipeline, really, in 2 prongs. First is end market. And we see the M&A in the end market being more active in this period of time. That's in the outpatient area. And then selectively doing some end market, what we call tuck-in acquisitions, maybe smaller facilities have round out an existing -- any existing footprint. It seems to be a little bit more activity in the end market levels. Because the new market activity, as you know, those are purely longer-term deals, I think during COVID, many of those potential new-market acquisitions were focused on managing through the pandemic just like everybody else and -- because of the lead time. We'll have to see once we get out of COVID, do those discussions pick up? We're open to moving into new markets like we did in North Carolina and Savannah before that. But generally, those are longer kind of M&A pipelines on there. We want to make sure that the market that we're moving in with meets HCA criteria. We want to make sure that the potential acquisition target is the #1 or #2 provider that has the opportunity to be in there. So just by the nature of that, I think we'll see more opportunities in market first. And then to the extent there are new market opportunities presenting themselves, we're prepared to execute on those if we believe that, that will lead to long-term strategic growth propositions that we're looking for. But in the meantime, I think it will be centered around network development and end market. And then selectively, we'll see what discussions occur with new markets after COVID begins to settle out here.

Okay. That's great. I mean, one area that you guys have -- you've been aggressive is you did that Brookdale acquisition. Can you kind of give us an update kind of your home health strategy, how's that performing? How's the integration? And how do you think you can unlock value in the future from that platform?

Yes. I mean, we executed that last year. It's just another example of building out our network. Obviously, there was a nice overlap with the Brookdale agencies, with the HCA markets, and we actually sold off in non-HCA markets on there. And it comes just a natural extension of our network as we evaluate moving into more postacute activity. Rehab is another example of that. We think home health makes all the sense in the world from a strategic standpoint, not only offering that service to patients that were in the network. It becomes kind of a discharge planning tool for our hospitals where we have an agency that we can utilize the discharge patients to the extent they need home health services post an inpatient stay. And it allows us just to maintain and capture those patients within the network on there. So the integration is still early, and we still think there's long-term strategic value there to unlock, and we're focused on pursuing that. But as we look at kind of building out the network, that's one area that we had historically not been in recent times, that it gave us an opportunity to move into. We're looking at expanding inpatient rehab as an example of that, and it's just a continued -- a continuation of building out a comprehensive network of offerings in our existing markets.

Makes a lot of sense. Switching gears, one area that's always been last 20 years, I've always heard about ER, ER, ER, a lot of investments in the ER. It seems like there's been some behavioral change around EPO and operational changes around the ER and how it's being used and how people are looking at it from a consumer perspective. How do you think it's being positioned post-COVID? And kind of what's your thoughts on that?

Well, obviously, the ER is an important access point for patients. So 2/3, 70% of our patients originate through -- or inpatients originate through the emergency room, so it's an important channel. Obviously, some of those ED visits were disrupted during COVID. Our experience was they were the lower-acuity ED visits. We actually saw, I think, continue to see growth in the higher-acuity ED, and we actually saw admissions through the ED increase through COVID. So it's an important access point for any health care setting, and it's important for HCA. We'll continue to appropriately invest in the emergency room service area. It includes freestanding EDs, which allows developing an access point in new geographies on there. Exactly how it recovers with a lower-acuity ED activity in post-COVID is -- remain to be seen. Some of those patients stayed away. They deferred care because the concerns of going into a health care setting during a COVID surge, and obviously, that's fully understandable. Some of those, perhaps, moved into an urgent care, and we're prepared to capture that into our urgent care network. So we'll have to see exactly how that settles out. But it will continue to be an important channel, and we'll continue to invest appropriately where we need to, to continue to grow that and ensure that we have adequate capacity to meet patients' needs in the marketplace.

So when we think of access points to your system, obviously, telemedicine is impacting business across the board in health care. Everyone's just talking about telemedicine, telemedicine. Kind of what's your thoughts around there, your kind of long-term strategy? How do you think that fits into HCA?

Well, I think obviously, telehealth was an important tool for all providers during COVID. And we, like others, saw a spike of our telehealth visits in COVID mainly from our physician-to-patient activity because of just a good access point. Telehealth and urgent care was on there. I believe that eventually, that will settle out. It won't be as high as it was during COVID, but it will be still there. I still think it will be a relatively small number of kind of our outpatient clinic visits will be done remotely, and we're starting to see people wanting to return to the clinic to actually have a face-to-face interaction with their provider. But we've got that capability, and we'll be able to adjust to where the marketplace is there. We need telehealth in really 3 kind of verticals. One is that provider-to-patient. It's important we've got that capacity, and we'll develop it both in our physician clinics as well as urgent care. But we also see the telehealth in the provider-to-provider. And even before COVID, we were building out a really robust network of telehealth capability within our markets to rural facilities in our markets mainly around neurosciences, behavioral health, other consults that we could use as outreach from our tertiary facilities into other providers and use that as a connection point, as an extension for those hospitals. And that continues to be an important channel, an important aspect of telehealth as utilized, and we're continuing to grow that area. Made an investment in kind of neuro specialists. We can do some neuro outreach on there. And then the third area of telehealth that I think was also born out of COVID was kind of in-hospital telehealth, where you saw ICU consults or other consults where we could really utilize that telehealth capability and architecture as an extension of our hospital-based providers. And we're beginning to see opportunities to build that out to a greater degree. So we'll see it continue to be important in the provider to patient arena, in the outreach arena in tertiary to rural facilities as an extension of their service capabilities, and then we'll see opportunities to develop telehealth inside the walls of the hospital as they extend our hospital-based medicine programs as well.

Okay. That's great. You mentioned earlier back, you were talking about you invested a lot in Florida and Texas, a lot of opportunities there, acquisitions. Obviously, those states have had a lot of moving parts on the reimbursement side. Can you kind of give us an update what's going on there in terms of the waiver programs and other issues with those 2 specific states?

Yes, as we know, the Texas waiver program has been a longstanding program. It's gone through different iterations over the past decade or so. Over time, as you know, from time to time, it's been challenged between kind of the federal and state activity. As we mentioned in our year-end call, there is a directed Medicaid program that's under review from the federal and the states contesting that. I don't have an update of that activity since our year-end discussion. We'll see how that settles out. It will have an impact on us and providers in terms of the amount of provider revenue we recognize. We still believe that it will be resolved this year, but it will likely be resolved in the second half of the year. It's too big and too important to providers in that state, and historically, they found a way to work those out. But relative to that specific program, I don't have any updates since our year-end call. Florida, from time to time, goes through different budget discussions around funding the Medicaid program. I don't know if I have any current update on those. From time to time, it's subject to review. But even without the -- even with the potential Florida Medicaid reductions, Florida is still a robust state for us, and we still see significant population growth. We have significant presence in the state, and so we're going to continue to invest where we see opportunities to round out our network in the state of Florida.

That's great. Well, one area that obviously continues to come up in every discussion with investors, and we figure we'll might as well open a discussion on that is labor. Labor has obviously been seeing a lot of pressure. There's been a high reliance on contract labor last year. Kind of just give us your updated thoughts on where is labor positioned right now, and then also talk about wage inflation as well.

Well, there is no doubt. Labor market has been disrupted in every industry, and it's been especially impacted in health care. I think it's our view, many -- much of that labor market was disrupted was due to COVID and for a variety of reasons that I think is obvious, one, there was fatigue by the clinical teams, and we saw people leave the workforce. We saw a lot of opportunities to people and clinical workers to leave their home, hospital or setting to move into temporary or travel agencies because of the supply and demand dynamics and the ability to move into those to really gain significant wage adjustments and then us, as a provider, having to utilize a high number of contract labor to meet that growing demand. And so that puts some labor cost pressures on every provider, including us during COVID, and we saw that especially acute during these COVID surges, and -- we went through. And we were able to manage through that, and it was important we had to make sure that we had the staff to meet those COVID surges. And the question ultimately will be, as COVID surges dissipate and we get to the normal level, all those dynamics begin to return to normal levels. And we have a belief they will, and they won't be as acute as they were during COVID surges in terms of people leaving the workforce to move into the temporary agencies and us having to utilize those and -- at the level that we had. And also, we believe at the rate we were having to pay, so it was a combination of we had to use higher hours of contract labor, and the rate for that contract labor were both factors during the many surges. And we'll need more time for it to settle out, but it's our belief and our planning assumption at this point as COVID surges begin to dissipate, those dynamics will begin to settle. I still think we're going to continue to see pressure on wages. We can manage through that within the context of HCA's revenue cycle, and we can manage through that as we begin to reduced utilization of premium labor, then we can invest into the base wages that we have going forward and still manage the cost per FTE but over some reasonable level on there. I think that's going to take some time to show itself. I think that the dynamics of the last half of the year will be better than the dynamics the first half of the year. But over time, we think that market will eventually settle out, and we'll be able to manage through that within the context of the HCA enterprise. But there's no doubt in the COVID periods, labor cost was pressured, but we're able to manage through that and I think adjust accordingly. But there'll be some choppy periods as we go through the recovery period on there, but we have a multiple-pronged initiative around labor and capacity. We're focused on our recruitment efforts and beefing up our recruitment teams and onboarding people effectively. We're focused on retention that we can focus on tools and techniques to reduce the turnover of people leaving during a post-COVID environment. We're focused on developing and adjusting new models of care that we can bring in other staffing levels, whether it be patient care techs, whether it be other clinical workers to help offset the workload of our nursing teams to ease that. And so we have a multiple-pronged effort to focus on staffing and capacity that we believe will help us navigate kind of this labor disruption period that we'll go through in the late '21 and '22.

You -- can you just also touch on the Galen School of Nursing and how's that helping you mitigate the pressures and also what else -- what other things you're doing to get the nurses back to the workforce, those you know of?

Yes. Well, the Galen School of Nursing is an important strategic asset for us. It was an acquisition we did a couple years ago. We saw a lot of strategic value being one of the largest employers of nurses and them morphing into being one of the largest educators on nurses. You can just see the strategic overlap on there. I think we will be up to 14 campuses of Galen School of Nursing at the end of this year, probably adding anywhere from 6 to 7 campuses a year. We have a goal or a vision to have a Galen School of Nursing in every major market across HCA, and so it will be an important channel for nurses. It also will be an important kind of alignment for our existing nurses to either gain higher education or even move into faculty spots on there. But it will be a long-term effort. In terms of the size of HCA important in several of our markets. But we also have really key strategic relationships with other nursing schools in our markets, and that's been a key strategy and a key effort that we've had for some time of having tight affiliations with other nurses school. But Galen will continue to be an important tool for us and will be a growing tool over the next 3 to 5 years as we build those campuses out. And eventually, I believe that we'll be the largest educator of nurses in the country and will be a nice feeder for us and nice complementary for us.

I don't want to kill the subject, but in terms of -- is there any other things operationally or from a technological standpoint that are innovative ways to deal with labor or also to, I guess, circumvent using the contract -- going to the contract in the labor world?

Yes. I mean, we're investing a lot of HR technology. Some of that is around how people can apply for jobs of HCA and applicant tracking that we can onboard them more efficiently and effectively. And I kind of put that in the blocking and tackling side of that, and how do we interact with prospective candidates that are looking for a health-care job. We think we have some uniqueness in HCA that we can offer them a career of a lifetime. And so we have a whole host of strategies in each one of those areas around retention. We have a variety of technology initiatives in play that -- try to make sure that we understand the engagement of our employees to the extent there's opportunities to address their needs and desires. We can utilize that through technology, through rounding, through issue resolution and all forth. And then really, we have this whole effort, we call it peer transformation initiative. We've got dedicated teams, Dr. Mike Schlosser is leading this, where we're looking at really new models of care or evolving models of care that will allow us to look at are there new ways of staffing units? Can we complement those with other health care workers? Can we look at letting nurses operate at the highest of their skill levels, and we can support them better? And so there's a whole host of efforts, and there's technology involved with that, that we can bring to bear. But all of those are in play, and I think all of those will be important as a compliance solution as we continue to deal with just trying to advance our response to the labor market.

Well, it looks like we have one minute left. So if there's any last-minute comments or anything, messages that you want to give to the Street, feel free in these last 30 seconds to...

Well, no more than what we already covered in our year-end call. I think the 2 years of COVID have presented some unprecedented times. We're extremely proud of how the HCA Healthcare organizations managed through it. I think the resiliency in the organization by our clinical teams, by the operations teams, the financial resiliency of the organization really showed during this period of time, and we're really, really proud of that. As we go in '22 to become -- continue to be a lot of variables that we'll have to navigate through. We believe in the long-term macros that there's a growing demand for health care. We're positioned very well. We'll continue to invest clinically and operationally to meet that. And we'll have to see how these cycles of a post-COVID surge environment materialize, but we think we're prepared to manage through those cycles as they present themselves.

Well, we're out of time. I really appreciate you guys doing this today. And hopefully, next year, we'll be back in person and see you guys in New York. Thanks again, and looking forward to seeing you in the future. Thanks a lot.

Thank you, Mike. Look forward to that. Take care.

Bye-bye.

Bye.