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

Good morning, everyone. Welcome to the HCA Healthcare presentation this morning, fireside chat. I have a research disclosure, the obligatory disclosure I have to read this morning. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com\researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. We're delighted to have Bill Rutherford, Senior Vice President and Chief Financial Officer of HCA Healthcare, with us this morning. And I'm going to throw a few questions at you this morning, Bill.

Great.

So maybe, first -- I mean, let's take a step back. Talk to us about strategy, HCA, the next 2 or 3 years. What could be different? What's the same?

Sure. Well, good morning. Good morning, everyone. It's great to be with you. We get questioned a lot, is our strategy changing in a post-COVID environment? And I really don't think so. When I think of broad brush, when you step back, fundamentally, the premise of our strategy is built on there's going to be a continued growing demand for health care in this country. And we operate in what we view are very attractive markets. And our strategy is to invest into our delivery networks, to try to continue to distinguish us as a provider system of choice. So we're investing heavily in building out the breadth of our network through hospitals and outpatient settings. We have roughly 2,500 settings today. And we're investing and deepening our clinical capability. So in these large markets with growing demand, investing into our delivery network, that expands our geographic reach, gives patients multiple access points, and deepening our clinical capability so we can take care of a full array of services will be an important part of our strategy. And then what we think really distinguishes HCA differently compared to many providers is we can utilize our national scale to support our local markets. And we do that in a variety of ways, whether it be administrative costs, whether it be technology initiatives, sharing best practices, clinical best practices, and then from a capital strategy, from a financial perspective. So broadly speaking, I don't think our strategy is going to change in a post-COVID. Obviously, you adjust from time to time on aspects of that strategy based on what the market conditions are at any period of time. And I think we have a reasonably long track record of being able to do that and deliver productive results.

Do you see more of that investment going forward on the outpatient setting side? Would it be -- obviously, you have a large group of ambulatory surgery centers, but -- physician practices. What do you see on the [indiscernible]?

I think so. I mean, we'll continue to invest organically through our capital structure, and we'll build hospitals. I think we have 8 hospitals we've announced under construction in Florida and Texas. But much of our network development is in the outpatient area, close to 150 outpatient surgery centers. We're pushing 250, 260 urgent care centers, physician clinics, freestanding emergency rooms. We're pushing 120 freestanding emergency rooms, probably another 20 or 30 into our development pipeline. And so that's really important. Today, roughly, we have 12 outpatient settings to every hospital. If you were to look at that 5 to 6 years ago, you might have seen 6 to 7. We believe, if you look at that 5 to 6 years from now, you could see 18 to 20. So we continue to see a development. And that does multiple things for us. It expands our geographic reach. It gives multiple access points for patients, multiple price points. And so then we're looking at how do we operate the network so we can take care of a full array of your needs when you do hit the HCA network.

Right. So the word inflation has entered discussions in -- over the last few months, and obviously, labor costs, temp staffing, a whole host of things associated with that. What are you seeing in terms of -- let's talk about staffing, and then let's talk about pharma cost, et cetera, where are you seeing pressure right now?

Well, I mean, it's clear. We're seeing pressure around the labor cost. We had talked about that earlier in the year. It was really highlighted, we believe, with COVID surges. We started to see that really present itself about this time last year when we were dealing with the Delta surge, and it really hit in January when we had the Omicron surge. And as we had this onset of patients, we had to make sure we have responsibility to make sure we had clinical staff to serve those patients that hit our hospitals. And we had to acquire temporary labor at a higher cost. And we've seen that since settle. We clearly have to be responsive to the market in terms of wages. But we've talked publicly that we believe, sequentially, as we go through this year, we'll be able to see a decline of the premium labor that we had to utilize earlier in the year as that begins to settle. And hopefully, we avoid these COVID surges as both the utilization as well as the average ROE rate we had to pay because the market was really disrupted during that period of time. And so we think we can manage our way through that based on the guidance that we've provided. But there's no doubt we're going to be in a little bit higher inflationary environment than we've historically had pre-COVID. And we understand there's a lot of effort to try to tamp down inflation, but we're going to manage through it. And we think we can manage through it within the whole portfolio of HCA. We have multiple strategies around our labor and capacity on there to really help counter those market dynamics. We've invested heavily in our recruitment functions so we can hire nurses effectively and into the HCA system. We're focusing very heavily on turnover. And being the preferred place to practice, if you will, inside HCA, we're focused a lot on capacity management, how do we efficiently process patients through the system. And then, ultimately, you may have heard us talk about these advancing new care models, where we can support the care team with a variety of different skill sets, whether it be patient care techs, patient safety attendants, whether we can use technology. So all of those are part of our response to kind of what's going on macro with the labor market. And we're hoping, as time goes by, we'll see some sequential improvement in there.

What are you seeing in terms of supply cost, surgical supply cost, drug cost? What sort of impact are you seeing?

We've got a large group purchasing organization, HealthTrust Purchasing Group, and they've done an outstanding job. And fortunately, we've been able to manage our way through the inflationary environment in supplies because many of our contracts were under contract during this period of time, just like many of our payer contracts were. And so we've been able to, I think, manage the supply cost there, at least the pricing piece within a reasonable level. But as those contracts come up for renewal, obviously, some of the inflationary trends are beginning to enter their way into those discussions. But we think, with our scale and our ability to kind of utilize our clinical practices, we can manage through that. But yes, there's some effort or some risk there's a supply cost inflation, but our teams have done a really nice job of being able to manage through that. And then if you look in the other operating area, it generally is around the physician support cost around hospital-based physicians. And again, I think when you put that over the backdrop of HCA, we can manage through those pockets that we may see going forward.

All right. So now I'm going to mention the R word, recession, which people are forecasting. Maybe you could give us a little history on how HCA has navigated a recessionary economy in the past and the impact on volumes, the uninsured, et cetera. How do you navigate that? And how do you think about navigating that forward?

Well, it's great. We're actually doing a study around trying to understand as there may be some changes in the backdrop of the economic climate. We really focus on 2 primary indicators for us, unemployment and inflation, and how that might influence for us. Fortunately, health care generally is very resilient to that area. But as unemployment, if it potentially increases, it has the risk of affecting coverage or affecting demand. Fortunately, today, we've had something we've never had in past recessionary environments, and that's the subsidies in the health insurance marketplace. And now that the enhanced subsidies are going to continue, then we believe that can be a buffer from maybe some of those historical trends that have gone forward. With inflation, we've seen peak inflation. And we hope, as there's Fed policies in place, we'll see inflation moderate. But generally, we're trying to affect that in terms of our pricing. And sometimes, when you're in a high inflationary environment, you can see that [ ensue ] into per unit pricing areas. But that's a big area for us is around trying to track these changes in the economic indicators. Fortunately, I think HCA has a really long track record of being able to respond appropriately to those market conditions and still provide good results for all of our stakeholders.

Great. Give us an update on Medicaid expansion, some of the states where you operate, the opportunities. There's been a lot in some of these governor's races that's become an issue of Medicaid expansion. What do you see happening?

The 2 states that matter for us remaining are Texas and Florida. And I don't think we have any belief in the near term that those states are going to expand on Medicaid. There's other areas afoot to support Medicaid funding in both of those states. So we'll just have to see how that plays out over the coming year.

And now redetermination and the impact of Medicaid redetermination going forward. What do you see as the impact on HCA in terms of [indiscernible].

Well, we're still assessing that. We're going to have to wait to see when does that start, how states will choose to implement that. But we think, because now the enhanced subsidies and the health insurance exchange are going forward, that, to the extent people lose Medicaid coverage because of redetermination, there's a fair number of those that could likely receive coverage in the health insurance marketplace. So we'll continue our assessment of that. But right now, we're not inventorying that, if you will, as a major head -- as a major force going forward.

Got you. Got you. Volumes. So touch wood, hopefully, we are sort of in a post-COVID environment in terms of significant variance. What do you see in terms of volumes inpatient, outpatient? What's sort of your views going forward on volume?

Well, we've said -- and we said this on our second quarter call. We have this belief that volumes will eventually return to their historical seasonal trends. Not exactly clear how quick that will show and won't be linear. We're still in a year-over-year comparison comparing to a heavy COVID year in prior years. But over time, we see the marketplace beginning to settle. As we look long term or maybe intermediate term, as I said earlier, we believe there is going to continue to be growing demand for health care and especially in the markets that we operate. We see population growth. We see demographic expansion. Right now, we're still in a full employment environment on those. And all those portend, I think, reasonably good things long term for volume. And it doesn't always show in a straight line as we go forward, but we still believe the volume characteristics in our markets are there, and that we're investing to be able to serve that volume as it does show up going forward.

So there's been a lot of focus on primary care. Obviously, there's been an Amazon, One Medical transaction, a lot of investor focus now on primary care and the companies involved in primary care. Maybe if you could just talk a little bit about HCA's markets, primary care strategy, where do you see that going?

It's a great question. We know there's a lot of movement in that market. If I go back to our strategy, our view is to have multiple access for patients inside the HCA network. So you've heard Sam talk about, we talk about, we have a multichannel primary care strategy. Clearly, having primary care physician clinics is part of that strategy. And we've got a large number of those that not only we employ, but we affiliate with. Our urgent care development is really part of a primary care strategy. Our pediatric efforts and our OB efforts are part of a broader primary care strategy. So in every one of our markets, we're looking how do we develop multichannel access into the network. And primary care is an important part of that. Much of the discussion is around primary care risk-based arrangements going forward, principally in the Medicare Advantage. And we have some of those in some of our markets. And we continue to evaluate what our opportunity is to move even more assertively into that area, but our real focus is to look at network development and have multiple primary care channels into our network.

HCA has always been a reasonably aggressive buyer of its stock historically. Maybe you could talk a little bit about your views on leverage and share repurchase and what -- philosophically, where the company is now.

Well, I put it under the backdrop of our capital allocation philosophy. And I'd like to think we've got a long track record of having a very balanced and disciplined approach to capital. Fortunately, we generate a reasonable amount of cash flow. So our first priority of capital is internal capital investments so that we can invest into our existing markets so that we can meet the growing demand for health care. We're doing -- we think we'll spend $4 billion to $4.2 billion this year in a capital program. And our data suggests that's very productive in terms of the return on invested capital that we can [ save ]. After that, we want to maintain the balance sheet in a strong position so that we can take advantage or execute on acquisition opportunities as or if they present themselves. And our balance sheet is in, we believe, a reasonably strong position. We're actually at the low end and slightly below the low end of our long-term stated leverage ratio of 3 to 4x leverage. We're a small dividend payer. So that leaves -- historically, we've dedicated our remaining free cash flow to a share repurchase program. Starting in '21, we executed on an enhanced share repurchase program, $8 billion of share repurchase in '21. Some of that was accounted for in '20. We temporarily suspended our share repurchase program during COVID. And then we went into this year, we said we might execute a similar-level amount to utilize the free cash flow and to utilize some of our balance sheet capacity on there. And fundamentally, it's one part of a balanced capital strategy. And we think, ultimately, that delivers long-term value for our shareholders over the long run.

In terms of the health insurance marketplace and payers, what are you seeing in terms of negotiations with payers on rates? Where do things stand with, without naming individual names, with major payers right now?

Well, we're focused on developing long-term strategic relationships with the major payers. Clearly, you get into contract negotiations, and there's always activity around contracts. And we think it's early, but there's a recognition that we're in a higher inflationary environment than we've historically been. And so as we enter new contracts going forward, those discussions are ongoing, and we think there's a reasonable recognition of that fact.

All right. I'll turn to the audience. Any questions from the audience for Bill? We have a microphone over on the side, I believe. Yes, go ahead. Just shout it out. Yes?

Can you highlight, do you have any markets within the HCA network that's kind of more mature in terms of that migration and maybe offer some perspective in terms of what you saw in profitability and how far that migration goes? And second of all, I mean, I guess, we can say at this point, it's not a 0 probability event that the Democrats hold serve across the board in November. So if there is an upcoming reconciliation bill again, what would you like to see in there? And what would you like to not see in there that you think could be there?

Let me take the first one. There's always been this migration into outpatient. And we've been able to manage through that. I think over COVID period of time, it was principally around specific service lines, really orthopedic surgeries, you saw move from an inpatient setting into an outpatient setting. And we think the majority are still within a hospital outpatient setting, done -- doing it within -- in the same suite. We think mostly that migration has probably already occurred. There may be a little bit left to happen. And there may be select other services that either because of technology, pain management, physician preference, that will move. But I don't know if we view that as a material headwind going forward because there always seems to be other businesses seems to backfill that. And we think, in orthopedics, in particular, we grew our whole book of orthopedic even though as it shifted care from an in to out. So those do occur. Yes, we take a little bit of a profitability hit when that happens, but we're able to manage through that over the whole context of our volume portfolio. So it depends what you're looking. If you look at total activity, inpatient and outpatient, you'd see slightly up. And clearly, there were some normalizing items as you went through COVID periods on there, but we're still seeing growth of that service line. It's just shifted from an in to an outpatient setting of care. And again, there are some pockets that happen around. There are some cycles that hit, but generally hits by a specific service area, either because there's a technology advancement or, I believe, in orthopedics, it's mainly due to pain management and anesthesia techniques that we're allowing people to go home after the morning of their surgery. And so there might be some of those continue, but we've been able to manage through those cycles over many number of years. Relative to kind of the political thing and whether policy changes occur, I don't know if I can inventory all of those. We hope that there will be a continued recognition of the inflationary environment we're in. And that will eventually show itself within governmental rates, number one. We're really encouraged that there's support of the subsidies in the health insurance marketplace. And I think that was a big positive indicator in the right direction. In terms of other policy changes that may have an effect for us, we're just going to have to wait to see how that plays out. Generally, it's difficult to get through major changes in health care just because of the consequences of the dynamics. So we're just going to have to see how those discussions occur in a post mid-election cycle.

We got a question over here. Yes, sir?

Two questions. One, overall volumes compared to where they were in 2019, are we ahead of 2019, flat for 2019, behind still based on what is to catch up? And then the second question is on the non-COVID admissions, can you discuss acuity levels, revenue per admission, payer mix? And is that trending favorably, not so favorably? Just any comments [ would be great ].

It's a great question. In the first question, we're close to '19 levels, really depending on what stat you look at. On the inpatient admissions, we're not quite there. We're a little behind still on '19. But we attribute much, if not all of that, due to this orthopedic shift due to in and out. When we account for that, we're really close to '19 levels. And again, we're just now in a period prior to the first quarter, now even second quarter, we hadn't had a period over that previous 18 months where we didn't deal with the COVID surge. So we're just now in a period where we're going to have a sustained period of time, if you will, with no COVID surges. And that's going to, I think, inform our thinking as we turn the calendar into '23. Regarding the non-COVID business, especially as we went through the second quarter, we were seeing moderate growth in the non-COVID. We were encouraged with the non-COVID growth at the end of the first quarter. We were seeing 3% to 4% post the January cycle in the non-COVID. It was in the 1s or 2s kind of year-to-date. And so we're going to take the balance of the year to assess that non-COVID return. And again, we think, over time, we'll return to those historical patterns that would show us 2% to 3% as a positive volume growth, both organically as well as our ability to capture share. And those are some of the things we're going to be assessing as we go into 2023 planning. In terms of the acuity, we've been able to maintain that. And I think that was an important point for us as we turn the calendar. Obvious -- or not -- maybe not obvious, but during COVID, we saw really nice growth in acuity, principally related because the lower acuity business was the one staying away from health care. So what we left with were higher acuity. And we believe, eventually, that would moderate. We wouldn't see that same level of growth, but our intent or our goal was could we maintain that acuity level. And thus far, we're being able to at least maintain that acuity level gross that we saw during COVID.

[ Do you have any ] [indiscernible]

Yes. We also said, as we turn the calendar, we do anticipate the Medicare population to begin return to the health care setting. That was a population that tended to stay away during COVID. And so I think that will continue to occur. We are not as focused internally as mix as a percentage of. As long as we can continue to see growth in both our commercial book and Medicare book, those tend to be productive for us.

All right, sir?

Question about the labor that you discussed earlier, which is, do you ever see -- have a view in the future to where labor could become a constraint to volumes?

There is that possibility. But I think if we were going to see that, and we did see a little bit of that, it was in these unique COVID surges. It's our belief, and we'll have to see how it plays out, that the market will settle over time. It was really disrupted starting in the third quarter of last year into the first quarter. And we believe, sequentially, it will begin to moderate and improve. But yes, there is a chance if the labor market became majorly disrupted again, and you didn't have the staff to serve the volume, you would have to manage through it. Our hospitals do that today on kind of a daily basis. It's something they do naturally as part of that. But it's our belief today that's mostly behind us, and we can manage through going forward.

Yes?

Just one other question in the area of robotic surgery. If you listen to some of the medical device competitors here today, there's going to be a large surge in robotic-assisted surgery. Can you talk about your capital allocation plans in this area [ as well ]?

Yes. I think we're one of the largest providers of robotic surgery. I can't quote you all the numbers, but in terms of either number of robots we have deployed or procedures being done. So that's an area that we're intent on, and we invest specifically around that, well, surgery. Whether there continues to be -- whether it's just a natural growth that occurs, as maybe historically the laparoscopic or other procedures' move to robotics may occur, I don't know if I see or I'm aware of a major surge in that. But it's something we are investing in. We buy a fair number of robots every year to be responsive to our surgeons and to the community. It doesn't deploy a lot of our capital, but it is something that we invest in. That's part of our service line and program of investments where we have opportunities.

Any other questions? Great. Bill, thank you very much. Much appreciated.

Thank you, Jim. Thanks. Good to be here.

Thanks so much.