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

Okay. I want to thank everyone for joining us today. It's my pleasure to be introducing HCA. HCA is the largest operator of hospitals in the country, as well as having a large U.K. operations. Today, presenting, we have Sam Hazen, CEO; and Bill Rutherford, the CFO. We also have Frank Morgan from Investor Relations in the audience as well. So thank you guys for coming.

I think one of the key things that's been a theme here this week has been labor cost. Maybe we just start there. How are you guys thinking about how labor is developing, how developed in Q1, expectation for the rest of the year? And where do you see the labor supply kind of normalizing out?

Let me give a few macro observations, Kevin, on what we're seeing and what we're experiencing, and then Bill can give you more details if you want more details on the results in the first quarter. . We've had 5 different surges since the pandemic began in May, with each one almost having a level of intensity that grew as we went through it. And during the early surges in '20 and '21, the labor market was a little bit more stable than what it was in the Delta variant surge, which occurred in the summer of 2021. And what we saw in the middle of that surge, which was a really intense surge with the patient cohorts and how sick they were with that particular variant, the labor market was getting turned upside down at that point and the traveler market was really hot. And people were having opportunities, and we don't begrudge them for taking advantage of those opportunities as an individual and for their families. There were tremendous disruption and turnover for us at that point in time. And we started seeing a fairly escalated level of labor cost in the third quarter of 2021. That has continued into the fourth quarter and on in the first quarter. Sequentially, it hasn't really deteriorated. We have seen stabilization in it adds compared to the third quarter of 2021. But compared to the first quarter of 2021, it looks to be tremendously disrupted. And it was actually disrupted in many respect in the third quarter of last year. Our revenue was a little bit more significant in that period of time because of that surge. Obviously, there have been significant turnover in the industry as a whole. Some of our employees -- some of the health care workers in general, have suffered through the stress and pain of COVID in what has been experienced in our facilities. As a company, we've taken care of almost 360,000 inpatient COVID-related incidents in our organization from an admission standpoint, way more than the other health system. And so the level of stress and strain that, that's created for our workforce has been quite significant. I think we have an appropriate response to these factors. We increased our recruiting capabilities significantly and have really looked at how do we treat the applicant as a customer even more so than we did previously. Our retention efforts are starting to show some early signs of progress with respect to turnover trending favorably in the quarter as it went through each month. And then we have other efforts around throughput management and capacity management as well as approaching different models of care. We have an opportunity in the midst of this challenge to adjust some of our approaches to care and extend the reach of our nurses. So those are short run things that we're doing. In the long run, I'm really excited about the acquisition we did at the Galen College of Nursing and what that represents for the company. That's, call it, when we acquired it in 2020, allowed us to embark upon an expansion plan. We have 8 new colleges that have already opened across different communities that we serve. We have 12 more in the pipeline that will open up sometime later this year and on into next year. And our vision is that each of our provider systems will have a minimum of 1 College of Nursing maybe over the next 5 years. In some communities, Dallas-Fort Worth, as an example, in Houston, Miami, we may have more than 1 college really supporting the size of those communities. So we think long term, we've got some really positive initiatives in place as well as the appropriate things we're trying to do in the short run. Obviously, from an economic standpoint, we're trying to reposition the cost of our labor, move out of the travelers in the contract expenses that we have to a more permanent and more cost-effective workforce. Again, we saw some modest improvements in the quarter around those, and we'll continue to work that as the surges subside and some of our other tactics take hold.

I guess that dynamic of the temp staffing, it seems like it's such a high number for you guys. It was almost 12% and which was -- I think what you say, usually, it's 2% to 3% of...

Depending on what stat you're looking. If you look at contract labor as a percent in nursing hours, it would normally hover around the mid-single digits, and we ran just north of 11% in the first quarter. And there's really 2 factors. It's not just the utilization of hours, but it's the cost of that hour given the disruption that Sam talked about. So it's our belief that as -- and we can avoid future COVID surges that, that market will stabilize. And so it will not only help reduce the utilization of the hours we have to use, but also the cost per hour can begin to moderate as well as we go forward.

Yes. So I mean, as that moderates, and I guess, Q1, I think it seems like it's the high point, is that your estimate for that?

Yes. We're hoping it was, yes.

So I mean as that moderates, then does that create a tailwind from a margin perspective into next year? Or will it be replaced by full-time labor?

There's a little bit of transition going on, as we mentioned, from temporary labor into kind of permanent workforce on there. And we think we've factored kind of reasonable assumptions in the guidance that we gave on our first quarter call. So we factored that transition going forward. But there's still some uncertainties in the markets that we're going to have to just work through as we go through the balance of the year.

We've had labor cycles in the past, where nursing shortages existed in very hot economies. They normalize over time. And we think here again, they're going to normalize. The actual enrollment in 2 of our schools were really record enrollments. In our Galen College of Nursing in Austin, Texas, we had more student supply and enroll than we had slots. We had the same thing in Nashville. So I think people still want to come into nursing. It may be a younger workforce than it was in the past. But between our education platform and our residency programs and so forth that we're using to help them increase their competencies, we're encouraged by those early signs.

And how long does it take for that capacity to actually turn into supply?

It's not going to happen in the second quarter. It takes a while to become a nurse.

But in addition, we have relationships with other nursing schools already embedded. So one of our major initiatives going on is to ensure we've got connections, both faculties as well as residents, with other nursing schools until Galen gets fully up and running.

Yes. So I guess as we think about that progression, I mean, how do you think about that moderation of labor costs? Is it -- is Q2 kind of stuck where Q1 was and then a bigger drop in the back half? Or is it...

Well, again, I think if we avoid COVID surges, that should not see the premium that we had to pay for contract labor. When you were in the middle of a surge, we had to have staff to serve those patients. And now that, that's moderated, we can begin to moderate those contracts in those temporary laborers. And so we're hoping that will continue to unfold as we go through the course of the year.

Okay. And then how do you think about, broadly speaking, your ability to get enough pricing to offset both labor, but I guess, just inflation, generally speaking?

Well, in the short run, as I mentioned on our earnings call, we are fully contracted for the most part in 2022. The government, we knocked on Washington's door. They don't really want to pay us any more at this point, but we'll have to see how that plays out. I think on the commercial contracts, Kevin, we are already having positive discussions with the payers. They get it that inflation is embedded in our input costs, if you want to look at it that way. And as we think about '23 and '24 contracts, I think we'll start to see some relief in our trend as it relates to what we saw over the past 3 or 4 years, and we pushed through renegotiations. We have really strong, I think, overall relationships with our payer partners, and we participate in just about every commercial contract in every market. And that allows us, I think, given the significance of our network and the relevance of our networks, to at least have productive discussions on that front. Is it going to be exactly lined up with our cost of labor right now? I don't know that, but I don't know that we need that. And so -- but I do anticipate us seeing some increases over our trend -- over the course of '23 and more into '24.

Yes. I mean, I guess when I think about the guidance that you provided this year, it seems to me like we -- again, assuming COVID spikes have largely subsided, it seems like labor, in general, was going to moderate or at least be stable from here as you shift from contract into full time. It seems like pricing only going to get a little bit better from here? Like, is your margin target for this year a good base to think of for future years and should it only get better? Or is there a reason to think that this actually takes a while to kind of flow through...

Well, 2 things. One, I think if you look historically at the company, even pre-COVID, we've demonstrated the ability to produce, I think, reasonable margins. You see the high teen, 20% margins. During COVID, obviously, we were benefited on margins because of acuity and payer mix trends. And there's a lot of variables that go into the margins. Obviously, payer mix, acuity overall volume to cover our fixed costs as well as just what we're dealing with, with inflationary cost pressures. So it's our goal to continue to operate the company at very, I think, reasonable and strong margins. Our guidance would suggest that hovers around 20%. So that 19% to 20% margin level in this environment, I think, is a very strong result for the company. We have multiple initiatives underway to help offset some of those inflationary cost pressures, not only in addition to the pricing, but other resiliency efforts that we've talked about previously. So all of those are going into our assumptions. And again, I think we can operate the company at reasonably strong margins going forward.

On a strategic level, we have a number of initiatives, to Bill's point, that we think have potential yield as it relates to margin. Our technology agenda and really infusing machine learning and artificial intelligence into an organization that is a great human learning organization, as I like to say, is going to help us with efficiencies. We have a very significant, what we're calling care transformation, an innovation agenda that I think is going to open up opportunities to narrow the variation that exists across our company and produce better outcomes pretty much across all dimensions of our business. That's the second thing I would tell you. And the third thing is around throughput and capacity management. We still have opportunities on that front. And then we're finding new ways to leverage our economies and scale. So I think, Kevin, over time, things happen in short cycles that complicate our margin. But we don't see anything structurally that prevents us from having industry-leading margins into the future. And with these other initiatives that we have, we think we can find some new opportunities. Now that obviously presumes that our revenue component is exactly where it needs to be. And again, there's a lot of moving parts with respect to that. But we're anticipating that maybe our revenue is where it is. And with these other initiatives, it could produce some uplift on our margins.

There were questions about like where that margin target settles out and we think about, to your point, you were in that 19% [indiscernible] kind of range in 2019 before that, like why isn't that where things settle? I mean, you mentioned cost reductions -- has there been a shift in the underlying cost structure that's permanent and durable that says '20 is a better place than '19 or...

It is better than '19.

A better way to think about it...

'20 is better than '19.

Again, I think there's a lot of variables that play in there. And I think, as Sam mentioned, over the long run, we can -- believe we can continue to produce strong margins going forward. There may be some cycles in between that we'll have to manage through. But that range is a really solid output for the company, given the revenue that we're able to produce. So in any one period, it may cycle through, but we hover in that area. I think that's a very strong result.

I'm not casting a dispersion here, but the second largest health system in the country had negative EBITDA margins in the first quarter. I won't name them. I'll let you figure that out, Kevin. But not on the for-profit side or public company side, but in the tax exempt side. So the first quarter was not easy. And I know you're beating us up right now on margins. And comparatively, it was a really remarkable performance by the company. We had record census in the third quarter of the company. Not record for the third quarter, record for HCA in the history of the company because of the Delta variant surge. And we did everything we could possibly do to make sure we had the labor to take care of those people and be there for the community. And again, that disruption has carried into the first quarter. It does anniversary, back to your point. But I think the challenges that the health systems in general, have dealt with, and then you juxtapose what we were able to accomplish during that period, I think it speaks to scale, it speaks to management systems, it speaks to conservative philosophies about being there for people, but also being there for our shareholders. And we think that's how we approached it. And we think we're positioned to come out on the backside of this, whatever inflation looks like, whatever the labor market looks like to be better than our competition and put the company's position to hopefully take advantage of some of those situations, but I'll just give you that as a reference.

And so let's turn then to the revenue side of things. I mean how do we think about where HCA's revenue is versus "normalized" revenue should be? There's been a lot of disruption on volumes. We always talk about where are you versus 2019, but you don't only talk about 2%, 3% volume growth. So we shouldn't be at 2019, we should be at 6% to 9% above 2019. So where do you think that we are right now? How much upside...

Let me start at the highest levels because I think it's important to have some context around how we view the volume picture. I mean first of all, we have an incredible portfolio of markets inside of our company. And those markets, generally speaking, have strong population growth great job growth and real opportunities for us to grow; grow our network, grow our market share, grow programs, really invest inside of an existing set of markets that are fortunate to have really strong attributes. So we think demand in our portfolio is going to grow because of population. It's going to grow again because of aging baby boomers and just what's happening on that front. And then there's this continuation of chronic conditions that, unfortunately, people have that sort of fuel demand. So our belief, is it in 2022? Maybe, but it's also on past 2022 that there's a positive scenario for overall demand. We are investing heavily in our networks. I think today, Kevin, we have about 2,500 ambulatory facilities that support our 185 hospitals. So if you imagine each hospital having about 12 or 13 outpatient facilities per hospital creating its own ecosystem, then networking that with a broader ecosystem from 1 community to the other, is how we think about our business. I fully anticipate over the next 5 to 7 years, we will possibly even double the number of outpatient facilities that we have supporting the inpatient platform and making it convenient for the patient, better price point for the patient and then better network with our hospital facilities to drive business. One of our greatest growth opportunities today is keeping patients internalized in the HCA system. We don't do as good a job as we possibly can to make it convenient and easy to navigate for our patients. And if we can do that, we think we can drive some growth inside of what already churns, if you will, inside of our systems. So we're bullish on demand when it comes to the longer run. In the short run, there are cycles. And we think 2022, there's some pent-up demand from the pandemic. There's a lot of job growth and activity in our communities that is yielding a pretty good picture. We had pretty good results in the first quarter on what we call non-COVID admission activity. And there's nothing to suggest that, that's going to change over the course of 2022. And so that's our view at this point. We need a few more months here to really judge things. We've literally, literally, for 2 years, only had 2 months post the surge where we didn't get into another surge. 2022, I guess I can say this. I'm going to say it. We're 3 months into a period where we haven't had a surge. So it's the first time we've had 3 months. And so I'm hopeful that we start to learn a little bit better, and it's not just judgments that we're making, but it's actual experience that's happening that gives us some sense of whether or not we're forecasting demand in the short run properly. But I think over the long run for us and for the communities that we serve, we have what we believe to be a pretty positive demand picture.

Yes. So I guess when we think about how that core volume has been trending. Are you thinking about some things that have just permanently changed? Like do you look at your ER and say, our ER is going to be 5% lower permanently? Or any other service lines where you say this shouldn't get back to normal at some point whether it's '23 or '24.

We'll need a little more time to assess that. I mean our ER volume in the first quarter, as you know, was incredibly strong, 15% growth, I think, over the prior year. There's obviously some lower acuity activity that may have found its way into an urgent care or maybe some other method. Structurally, I don't think we see anything that changes our long-term demand outlook or that's going to materially change how individuals present to the health system at this point in time. And so no, we don't see anything really largely that's structural there right now.

And I guess when people have been thinking about the pent-up demand question, the thought has been low acuity. And you look at where managed care and how stronger payer mix has been, the thought is that maybe it might be Medicaid or Medicare, which have pulled back more. As low acuity and worse [indiscernible] comes back, how do you think about the margin? Is it actually better than people think because it's all incremental? Have you already covered that thought?

I mean you look at margin or you can look at absolute contribution. And so we like to look at the absolute contribution piece of that. And so we look at margin and payer mix on there. So we do believe Medicare will begin to return to the health system. We were benefited with the payer mix stat itself. But we continue to see reasonably strong -- is that me?

You use your hands more than I do.

I'm sorry. Reasonably strong commercial growth. And so as the Medicare population returns, we still believe the fundamentals are there. We'll continue to see reasonably strong commercial growth on top of that, too. So we think we can deliver a good output as a result of that.

Yes. So I guess that's kind of an important point. I think as people think about mix shift, and there's 2 types of mix shift: one is when Medicare grows 3 and commercial is down 1; and 1 is when Medicare grows 3 and commercial is up 1. And the second scenario is very --

That's fine.

And that's kind of how you're thinking about it that...

As long as we continue to see that growth in the commercial segment is strong. And again, I think the incremental growth of the Medicare segment is productive for us as well.

Okay. And the other thing about the company that's pretty impressive is just the cash flows. How do you think about where that cash flow goes. You've been stepping up the share repurchases a lot more, but what's the deal out look like? You mentioned outpatient. How do you think about that?

Well, again, I think we've demonstrated, over the long run, a really disciplined and balanced approach of our capital allocation. And to your point, a really strong attribute for the company is we generate really strong cash flows, probably somewhere between $8.5 billion to $9 billion of cash flow from operations this year. Our first priority is to make sure we're investing into our existing markets. We've earmarked about $4.2 billion of internal capital investment this year, and that's to capitalize on what we see some of the growth opportunities in the market through inpatient capacity, through service line development and outpatient network development. And so that's a really important element of our capital strategy. The balance sheet is still in a really strong position. One of the strongest positions it's been in, in quite some time where we ended the quarter's below the low end of our long-term leverage range, which is 3 to 4x. Again, we were below that. So we have ample balance sheet capacity to execute on acquisitions if they present themselves and to give us flexibility to continue to go forward. We pay a relatively small dividend, and we've been dedicating a piece of our capital to our share repurchase program. Paused that in '20, given COVID. We re-upped that to be just over $8 billion in '21, and we're anticipating '22 to be approximately about the same, about $8 billion as well.

Yes. No -- that's impressive. I guess how are you thinking about some of the governmental coverage changes that are potentially happening over the next couple of years. So you've got the extra subsidies that might expire next year. You've got redeterminations that will kick in at some point. How do these things impact the company?

Well, we're looking at those, and we're -- we continue to do our analysis on Medicaid redeterminations. We'll just have to see how different states choose to adopt that effort. We believe what we've seen so far that many of that population that may lose Medicaid coverage may achieve coverage in the health insurance exchange. And so that's net positive for us. If you think about it, for every 3 lives that lose Medicaid coverage, if 1 ends up in the health insurance exchange, that's a net push or positive for us. So we believe that over time, we'll be able to navigate through that. But again, we're going to have to wait to see how different states choose to elect that and what actual the details are. We're gearing up to be able to help people understand what their enrollment and coverage options are if they find themselves displaced out of the Medicaid side. In terms of the subsidies in the exchange marketplace, again, we're keeping our eye on that a little too early for us to make any broad assumptions as we go into our '23 planning, we'll look at that. But I think there's multiple support mechanisms that the administration and others are doing to keep people enrolled in the health insurance exchanges. And that's really been a positive attribute we've seen during COVID. Our health insurance exchange enrollment and our volume and our access to those lives has been really a positive trend for us as well.

Yes. I mean is there -- what do you think the outlook is of actually getting an extension there for that.

I don't know, of the health emergency?

Well, I was actually -- I'm thinking about the subsidies, enhanced subsidy.

I don't know. I would think there's a lot of effort to help people stay insured. And so hopefully, that will be recognized going forward.

Okay. I guess one of the other questions that we get a lot for you guys is on the supply side, there's been a lot of talk from some of the device manufacturers about inflation and surcharges and things like that. How are you seeing this?

Well, fortunately, we've got a very solid supply chain operations through HealthTrust Purchasing Group. And just as we go to the payers trying to get some recognition for the inflationary pressures we're in, yes, suppliers come to us to try to get some recognition of that. Fortunately, similar to our payer contracts, we have locked in pricing for a large portion of our supplier contracts. And so we've been able to manage through that at this point. But as those contracts come open for renegotiation and renewal, that's clearly a factor we're going to have to pay attention to and navigate through. But so far, the team has done a really nice job of being able to work with our suppliers strategically. Again, just like with our payers, we have really good relationships with our major suppliers. We understand their pressures, but also have them understand that we don't have the ability to necessarily pass it through on our side, so they can't expect us to bear all of that weight. So we're navigating through those conversations as we speak.

Okay. Great. And we've seen some other companies diversify outside of the hospital business and on other service lines, whether it's surgery centers or psych hospitals or things like that, outside of their markets. I mean you guys have been doing that only in your markets. So can you talk a little bit about that strategy? Why is that philosophy the better way? It's a good business, why not just own it? Why do the Brookdale-type transaction where you buy home health and then not keep the act of [ tipping out ] in the hospital market?

Our model and our belief today is having local scale and really leveraging the system locally and then connecting that to a national system is a formula that works and one that really adds value across all the stakeholders that we have connected to our company. We have looked at certain aspects of our business to see if there were some unique opportunities to go outside of our sort of local market model and system model. But you take home care as an example. And we think home care is a way to extend our provider system in the communities we serve. So maybe we can make a little money on home care. The second thing that it does is that it creates efficiency inside of our hospitals, potentially, for better discharge planning and better sort of throughput. And the third thing it does is it keeps us connected to the patient when they're at home. And so if they need to repurchase health care, then we're sort of connected there. So there's multiple channels of value potentially with that. If we just add that in a particular community, it doesn't present sort of a multichannel value proposition -- and we found that focus to be a better model for us. And so at this particular point in time, we don't anticipate anything changing from that approach. Again, we're fortunate to be in great communities. I mean in DFW today as an example, 7.5 million people in the DFW Metroplex. It's forecasted to be about 9 million people over the next 15 years or so. We are gaining market share in DFW in a very significant way, and we moved from third to second, and we're approaching first. So why not invest in a community that's going to add a Nashville almost over the next 15 years as opposed to go into another community where we don't have the same scale. So again, back to the portfolio, back to the attributes of our portfolio and the opportunities that it presents and more conservative allocation of capital. We think, coupled with a multichannel value proposition is a better approach for us. And we think that's why we land on industry-leading economics, too, Kevin. And we stayed true to that since 2011. We had the best decade of growth we ever had from 2011 to this point in time. We went from 23% market share to 28% in growing markets. And so we continue to believe that's the right approach for us.

That point about the discharge kind of reminded me. With Q1, I guess, some companies were complaining about not having a place to discharge patients, and that kind of backed up length of stay. You also mentioned in Q1 that the COVID acuity was a little bit lower than you thought like the rest of the revenue is going to hit. Are these things largely kind of normalized now as we think about the rest of the year?

Well, the COVID acuity probably. We factor that in, too. But I think the discharge planning effort of patients and finding the appropriate level of care post an acute hospitalization has become a challenge at times, whether it's going to a skilled nursing facility or some other extension of care. So that's what our teams work through. One of our major resiliency initiatives is to consolidate our case management and bring technology and predictive analytics and assist us to those discharge planning processes that occur.

Post-acute is labor intensive, too. So the health care system is suffering its own supply chain shock, and it affects all aspects of it.

Because when you guys have lowered your guidance in Q1, you actually made a comment -- I think you used to make a comment, Sam, on the call kind of like once we know where things are, we can react to them and we can manage through them. And that was kind -- my first initial thought was this was a bad quarter, but HCA knows what they're doing, and they're going to figure it out. I mean -- do you feel like you have that visibility on the top line to manage the business to as we head into the next several quarters? Or is there still a lot of uncertainty about where that revenue volatility is going to be?

Well, like I said, we've only had almost now 3 months beyond the surge. We're making judgments as best we possibly can, and we'll continue to make those. But we need a little bit more normalized experience to fully land on exactly whether our viewpoints are right or wrong.

Yes. All right. Perfect. Thank you. That's all the time we have for today.

Thank you. We appreciate it.