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

All right. I'm A.J. Rice, Healthcare Services Analyst at Credit Suisse. Thanks, everybody, for being here, and we're very excited to have HCA Healthcare is our next presenter, Bill Rutherford, the Chief Financial Officer, and he's going to represent the company today and very well, I'm sure.

And Bill, maybe just as a general opening question. If you think about the year, we're 10 months in, what have been some of the wins or positives you'd highlight for HCA year-to-date? And what have been the challenges or some of the challenges?

Well, I think the way I would answer that, probably call out 4 main observations that we have for thus far in the year. And we talked a little bit about this on our third quarter call. And first, our top line metrics are stable. We're pleased with where the volume trends, payer mix and acuity are. We have to -- remember, we've only had really 6 months or so for the past 2.5 years where we haven't dealt with COVID. So this period of time has kind of given us a read on the business. And we see our top line metrics relatively stable. They were consistent between Q3 and Q2. And we're encouraged by that. And we're going to continue to evaluate that as we finish the year and go into our '23 planning guidance. I think the second observation that I made that we're seeing some of the labor trends improve. Obviously, that was a challenge for us in most of the industry early in the year as we were in different COVID surges and the disruption of labor market. And we're focusing heavily on improving retention, decreasing turnover. We saw some favorable trends on our utilization of contract labor in Q3 compared to where we ran in the early part of the year. We're not settled yet. I mean, there's still more activity there, but we're pleased with the trends that we're seeing thus far. I think the third observation is an obvious one for most people and inflation is real. We haven't dealt with an inflationary environment like we're dealing with in quite some time. I think our organization is responding very well. Our teams are doing a nice job, but we're having to be mindful that we've got resiliency programs in place. We're advancing our supply cost trends have been really strong but we're having to deal with an inflationary cost environment that we hadn't had to deal with in quite some time. But again, I think it's something that we're focused on and the teams are doing a really nice job responding them. And then last one I'd call out is we still believe the long-term growth prospects for the company are good. When we look at our markets and the demographics and economic trends, we look at our position in the market, we look at capital investments. We look at the opportunity to do some select network acquisitions, whether it be urgent care or surgery centers, imaging to add to our settings, then we believe there's reasonably good growth prospects for us going forward. So that would be kind of the observations of where we are in '22. And those are the observations we're carrying with us as we go into our 2023 planning process.

So when you look at the most recent quarter, I think your same facility admissions are down about 1.5%, but very good growth on the surgery side. How much is just sort of you're comparing against a high COVID quarter a year ago, which probably depressed surgeries? And how much of that is starting to -- and obviously, made it a tough comparison on overall volumes versus how much can you point to as normalization starting to see the return of surgeries and so forth?

Yes. I guess 2 things. When you look at year-over-year comparisons portion in Q3, almost every volume statistic was pretty significantly affected by last year's COVID surge. Last year, with the Delta COVID surge, was probably the busiest one we had. I think COVID was almost 13% of our admissions last year in the third quarter, roughly 5% third quarter this year. And so that squeezed out surgical volume, both inpatient and outpatient on there. So I'd say the year-over-year comparisons were mostly the effect of the COVID surge last year. So we looked at sequential. Our sequential inpatient surgeries we're still up about 1%. So again, going back to our commentary the volume trends were stable, and we were pleased generally with the sequential trends in volume. Our non-COVID volume was actually up, I think, 6.8% or somewhere in that neighborhood for the quarter. So again, that's given us a little bit of an indication that we believe that historical seasonal demand patterns will return. All the things we look in the marketplace, whether it be demographic growth, employer numbers, our market position suggests that things are starting to open back up, and that should pertain good things for us.

Yes. So to show that sequential increase seasonally, you usually would see a step down, I think, from second to third. So anything to read from that? Is that actually suggest maybe even stronger or...

Yes, I don't know is the honest answer. I think that's a little -- while we need a little bit more time. But you're right, third quarter generally is our slowest quarter for a host of reasons, late summer. And then fourth quarter generally becomes a pretty good quarter for us. So we'll just need a little more time to assess that. But nothing yet. I think we do believe pattern -- demand patterns were interrupted during last part of last year, early part of this year. It's hard to tell how much further pent-up demand, just recovery people returning to normal lives and what that impact is going to be going forward.

And I know you've talked about as you return to a normal seasonal pattern, you get people in the fourth quarter, using up their co-pays and their deductibles and then one to accelerate the use of elective procedures. Now there's some chatter in the market about flu and different dynamics there. Any early comment or read on fourth quarter? I know you expressed a hope that you might see an uptick or can you say that at least there's nothing to make you back off of that at this point?

Yes. I mean no specifics that I can give on the fourth quarter, yes. But nothing's alter our view that those historical trends should return. At some point, you might expect that probably what we're seeing is in track with kind of national trends. And again, we'll close the quarter and give you our full commentary in January, but nothing has changed our view of what we believe demand patterns will eventually return to.

Right. Okay. You talk about being encouraged with acuity sort of hanging in there. There had been this talk about the fact that the COVID volumes were pushing up acuity. And then when that went away, it might be a challenge and impact net revenue per adjusted admission, so forth. It sounds like you're feeling pretty good about that. I know the companies for a while, been making investments in these higher acuity service lines, is that sort of part of the offset, give us some flavor.

Yes. As you know, there's a lot of variables that will go into that acuity number, you're right. COVID did bring a higher acuity medical case. But to your point, we're starting to see some of the surgical volume return. So that's a factor in there. So it's hard to get an exact beat on it, but we said early on, if we can maintain the acuity levels we saw mostly through '21. I think that's a net positive. I wouldn't expect the same level of growth. Many of our operational initiatives, our program investments, our expansion investments are continuing to grow higher acuity services. But we also know some maybe lower acuity services stayed away from a healthcare system. They may return. That's not a bad thing for us as long as we continue to see growth in some higher acuity services.

So as long as they don't push out...

Exactly.

The higher acuity that may take your averages down over time a little bit, but...

It's still productive.

So incremental volume. Yes. Maybe that is a question. Where are you at as you look around the portfolio, you're in a lot of fast-growing markets. Do you have capacity issues in any markets at this point? Are you needing to add?

We are adding a lot of ancillary and access points, but I'm thinking about in the core hospital business.

So are you at a point where you're bouncing up against any capacity concerns?

In some places, we are at certain times. And that's part of -- that's what our capital program is intended to remedy ahead of time. And whether that is through inpatient expansion. You may know, we've announced, I think, 8 new hospitals across Florida and Texas. So much of our growth capital investment is to add capacity to make sure we have that capacity to meet that growing demand there. We have to manage the labor market, too. And you've heard us talk about on the call, we've had to manage capacity a little bit, just to ensure we had the clinical labor to serve that. And we weren't as fully open as we want to be in the third quarter. I think that's a future opportunity for us, too, as we can get to full complement of labor to open it up. So all of those go into the equation. But there are some -- we're running really high occupancy levels. So -- and with our outlook of growing demand, we know we have to put some of that capacity online today so that we'll have that capacity in order to meet what we believe will be a continued growing demand for services in our markets.

Dealing with the labor issue, some of the players in the market have said, "Look, I'm going to stretch out my scheduling, so I don't have to take these contract labor to meet that demand. Others have said, no, I want to grab that demand and grab that share because it will be sticky and labor will work itself out. My perception is HCA's fall more on the grab the share side, but correct me if I'm wrong and make a comment on that.

Well, you can -- I don't know if we can characterize one position for the whole company. I think it's managed facility by facility, shift by shift there. We don't have any really kind of overlay corporate guidance on that. Our teams do a really nice job of just managing the environment, making sure that they're managing their capacity with the utilization of contract labor. Yes, we want to be smart about that. And if there's volume to be had and we can obtain the labor to serve it, and we think that's productive. And then that's what we should do. But those really decisions are made facility by facility, almost shift by shift. And it's really hard to characterize one posture that we have as a company. And so again, I think our teams do a really nice job in managing through what has been difficult environments over the past 12 to 18 months.

Right, right. Payer mix at times, has been favorable during this COVID pandemic for you guys. That's not true necessarily across the whole industry. Some people saw more COVID be more government oriented. But it sounds like even as we're coming down on that COVID, you're holding in there on your payer mix. Is that what you're seeing? And do you think you're stabilized at this point?

I think so. I mean, yes, we were benefited just in the mix number because the Medicare population was declining quicker than the commercial population during COVID for, I think, obvious reasons. Honestly, the mix numbers are important, but we tend to look at just overall growth by category. So even though Medicare population may return even at a faster patient in the commercial that may affect the mix in terms of percentage of as long as we can continue to see growth in both of those segments, it's very positive and productive for us. And when we at least look at our markets today, we see support in -- for the health insurance exchanges with the enhanced subsidies. So we saw that benefit during COVID as well. And all indications is that support is going to continue and there still in a robust employment environment in our markets, good demographic growth. So Yes, there may be some changes in mix, but we're holding on to mix so far. But even if mix moves a little bit, really commercial as a percent of total -- as long as that commercial segment still has some growth and Medicare still grows, those are both positive [ transports ].

And a lot of attention on the whole Medicaid reverification now, you're in markets that are a little more skewed to commercial, a little less Medicaid intensive. But can you give us some flavor? Obviously, we got this extended subsidies, which is probably a positive for you. Do you -- if people go to the exchanges as they lose coverage, does that mitigate? Or I mean could this even be a positive for you? How do you think about that?

Well, we think it definitely has the potential mitigating it. And there may be an upside case on there. I think the good news is that if people do lose Medicaid coverage mainly because of their employment status, then there's the enhanced subsidies and the health insurance exchange to capture those. So we can help our patients and people in our communities manage through that. Then we're calling that as kind of a net-zero for us on that. I think there is a scenario that we could imagine where it could be positive if more of those find their way into the exchanges. We're going to need a little bit of time to see how different states choose the timing by which they enact the redetermination process, and that will probably be sometime during '23.

When you think about those marketplaces, public exchanges, where does that shake out in terms of how much you're reimbursed? Is that close to commercial? Or how would you describe it?

I describe it as probably our second best payer class. So yes.

Length of stay during the pandemic had been an issue with some of the post-acute guys had their own set of issues and struggled with labor. And obviously, for you, if it's a Medicare patient, if they're backing up into your hospital a little longer, that's not a positive. Are you seeing that ease? I know you've taken steps like the Brookdale Home Health. Is that helping you? How would you describe what's going on there?

Sequentially, a little, but not enough. To be honest with you. I mean part of our early kind of laboring capacity was to help ensure that we're managing length of stay appropriately. And that is through ensuring you've got an adequate post-acute network that patients can be discharged to. And to your point, those were challenged during COVID period. So we are seeing some improvement, but not quite where it needs to be. We have reorganized as part of our resiliency effort, our case management efforts into much more of a shared service and organized approach, bringing technology and predictive capability so that we can help patients get to the appropriate post-acute setting. And so we're putting a lot of time, effort and resources in that effort. So we've seen some improvement but not where it needs to be yet.

Okay. Okay. Is that an area where you might do anything beyond what you've done with Brookdale to proactively provide yourself with [ outlines ]?

It could be. I mean, to your point, that was part of the Brookdale and the home health thesis is that we discharge a lot of patients to home health. We can integrate our own home health agency, we can facilitate that process. We're still in that integration just because of just other market dynamics, but we still believe that will provide a very good avenue for us. And I would tell you, selectively market by market, we will evaluate or are there opportunities to move into post acute. There are generally not as many national moves, those generally become regional moves for us. So we're open to that if the right strategic opportunity presented yourself.

On managed care pricing, obviously, the government gave you a little bit of relief in the Medicare rate update was better at least than the proposed rule. Are you seeing on the managed care side any recognition, some guys are saying they're bumping rates up a little bit to help our providers and I'm assuming a lot of that's going to hospitals. And others are saying, well, we're using more value-based arrangements and stuff. What are you actually seeing as you think about the '23 on your Medicare pricing versus historical trends?

Yes. It's a great question. And -- as you might imagine, we're having those conversations. We have what I think are really good relationships with our major payers. And I do think there's a recognition by the payers that the inflationary environment we're in. But obviously, when you're at the negotiation table, there's a lot of variables that come into play with that. So we're appreciative of their effort. We think there are some more opportunities to gain recognition in that. You know we've talked about, we generally have 2- to 3-year contracting cycle. So we're beginning to introduce that in a discussion and we're encouraged with the relationships that we'll be able to see some marginal improvement in that.

So in the rate updates, I mean, I think historically, you've been talking about 4-ish percent increases, maybe 3, 5 or something. Are you seeing a little bump up to next year on the ones -- I know all your contracts aren't renegotiated in any given year, but are you seeing a little bump up in the ones?

Yes, I won't say it's universal, but we've had some successes in that area. And so again, we're pleased with the relationships we have with the payers, and we're going to continue to find common ground in that area.

What's your view on the whole value-based is an option to sort of make economics a little more favorable. I mean I know a lot of that's happening on the physician side as opposed to the hospital side, but is there anything happening there that presents an opportunity for you? .

Well, I think there may be. There's obviously a lot of activity in the marketplace with this value-based care discussion. The way I think I see it in the marketplace, it's primarily around Medicare Advantage and helping patients kind of navigate the system of care efficiently, and that's generally through a physician-centric model. And we have a big physician organization that we have an opportunities, and we do engage some value-based models. And we'll continue to explore other opportunities to even go further into that area. And so I think just when I look at the backdrop, we're going to see more individuals move into Medicare Advantage programs. We're going to see more introduction of value-based models that are physicians -- and we partner with a lot of those groups already. And I think our just position in the market, we'll have opportunity to explore the right way to grow that area. They tend to be more regional. It's hard to bring a large-scale solution to that. So we see it market by market or region by region. But there's clearly a lot of activity in there, and I think we're positioned well to operate in that space when it's appropriate.

How many -- have you got a number for how many doctors are in where you own the practice, you own them and they're employed by you. How big is that?

It's pretty big. But I would tell you, it's probably about 15% of our community physician base. And so that's an area that is continuing to grow as we've gone through the years. It has peaks and valleys on growth, but it's an important strategic network development for us as employing key physician groups in our market. And again, there are some regional differences and there are some markets that are more employed market than other markets on there. But I'd say about 15% of our physician complement are in employee model. And then we've got a large of our percentage of our hospital-based physicians that are in either a joint venture or some shared governance model as well.

I mean if you look around, there's a lot of activity in that market. Would there ever be a reason to sort of -- I know I think most of that physician stuff is managed at the local or certainly no higher than the regional. Would it ever make sense to aggregate that and then you have your own very highly valued [indiscernible] company.

For our community-based physicians, it is aggregated. We have an organizational structure. Dr. Michael Koff, our physician services group been in place for a while that manages our own -- our employed physician clinics. They do all the development. They do clinic management. They do all the clinical program advancements and working with our markets on strategic development of our physician networks. And they also oversee the relationship with our hospital-based physicians. So I almost look at the hospital-based physician space in the community physician space a little bit differently. Hospital-based physicians space, we are exploring other models in that case when we think we need to, whether it be a full employment model or looking at adjusting some of those. And we've got multiple models with our community-based physicians as well.

Okay. We get [ last ] periodically about all that people see with the shared risk arrangements with physician groups and they keep hearing we're trying to reduce hospitalizations. How do you think about the impact of that on your business near to intermediate to long term?

I think it's part of the overall kind of value-based care equation. I think as I think about it, I see it mostly today in the Medicare Advantage market. And you're right, as they come under management, there are efforts to manage utilization. And that may have an impact on hospital utilization or even ER utilization. But I also say some of the markets that we operate in are some of the most heavily penetrated Medicare Advantage markets that are managed, we still have very strong inpatient growth and occupancy levels. So there may be some effort to manage down hospital utilization, but that's not new. That's been in most of our markets for...

You're thinking about what Southern Florida...

South Florida, Northern California, a couple of other markets that are really heavily penetrated and they've got a have an organization helps manage those. We coexist in those areas. And so there may be, as that platform advances some reduced utilization, but we still are able to backfill that with good inpatient growth as well.

We talked a little bit about how contract labor costs are coming down. When you think about your base -- employee base, I think, historically, that was sort of a 2% to 3% increase. I think it stepped up some this year. Do you have any -- how much of -- do you think it's going to an aggregate step up this year? And do you have any early view on next year? Is -- and by the way, do you give a rate increase once a year? Or is it market by market?

We typically do it once a year. It does have some market nuances to it, mostly historically, our annual merits would mostly come in the third quarter. We did, as I think maybe understood we have to give and did give above-market or above-trend adjustments this year to be responsive to the market. Fortunately, we have the ability to absorb some of that through the reduction of our contract and premium labor. We can manage through that within the context of the HCA portfolio. A little too early to talk about '23 yet. That was part of our discussion. We want to get the balance of this year completed, go through our detailed planning process. And then we'll have some dialogue with you in January, but [ our ] thinking. But clearly, as I said in my opening comments, the inflationary environment is real. We have to be responsive to the market, but we think we can manage that appropriately in the context of HCA's overall kind of portfolio.

And I think on the call, you did call out, if I remember right now, that September increase. And I think your increases are designed to sort of coincide with the rate increase you get from Medicare, if I remember right, potentially. So that prompted a lot of questions I got, was the rate increase on the labor in the early part of September. So you absorbed 1 month in the third quarter, was it toward the end. So it's now going to be offset by those rate increases. How do we think about that? Not that we're not looking at every moment by moment, month by month, but anyway. .

Yes. I don't know about timing, but generally, our baseline kind of [indiscernible] would be, what kind of rates do we have versus what kind of wage rates and try to equalize [indiscernible] it's not a perfect science or it's not as algorithmic as...

So if you announce it in September, is it generally effective on the day of announcement or generally gets phased in over the next month...

Really announcement, I would say -- the way I would think about is the adjustments we made in the third quarter, you could probably average those halfway through the quarter. So you got half of them this quarter, and there's some tail effects...

You've mentioned the supply cost that you were somewhat insulated this year on the inflationary updates there, but something as contracts roll off, we got to keep an eye on for next year. Any updated thoughts on that?

No. One, our teams do a great job, our HealthTrust Purchasing Group and all of our supply chain -- just supply chain executives do a great job in helping us manage through what it's been, as you can imagine, a difficult environment for the past 2 years, and they've put us in a really good position this year. And we haven't seen the supply inflation that you might think because we're able to convert many of our contracts or at least extend them during the COVID period, and that's benefited this year, but to your point, when those contracts do open up, then we've got to manage through those contract periods on there. We -- our team is doing a nice job if -- when those contracts come up of looking at alternative sourcing [ RFP ] and the like. We think we can manage that, again, against the backdrop of our revenue profile as well as the overall supply expense team. But our teams have done a really nice job this year in helping manage our supply cost trend below trend.

Okay. When you think about capital deployment, obviously, share repurchases have been a huge part of the HCA story and you've done a tremendous amount last year and this year, I think almost $8 billion last year, $7 billion is a target for this year. Some of that, it sounds like when I've talked to you guys as a catch-up from not doing much in 2020. Where does that all settle out? What sort of a normal run rate? I mean you've got cash flow if you don't do acquisitions to sort of support a pretty high level of share repurchase. Is that sort of -- do we think of it just as a cash flow suite? How do you think about that? .

Well, each year has a little different nuance. Yes, we -- I think one of the attractive characters of the HCA, we generate a lot of cash flow. So it gives us optionality. Our first priority is to invest capital to meet the growth objectives, maintain the balance sheet in a strong position so that strategic acquisitions present themselves, we have the ability to do it. And then we look at the appropriate balance of capital. Historically, we would dedicate -- historically being pre-COVID, we would dedicate mostly our free cash flow to a share repurchase program. We paused that in 2020 for obvious reasons. '21, the $8 billion program we did was largely a catch-up of '20. '21, we went into the year below our stated leverage ratio of 3x to 4x. So we said, well, let's dedicate free cash flow plus bringing the balance sheet up to the low end of our leverage and that got us to that $7 billion to $8 billion range. And now as we go into '23 planning, we'll continue to look at what is the right allocation given the whole environment we're in. So we'll talk to you further details in January on it. But historically, that's been a very important part of the capital allocation formula of HCA. We think it's delivered long-term value for shareholders and other stakeholders, and it will continue to be an important part of our capital allocation philosophy.

You've had a pretty robust capital -- a CapEx spending level. What's happening in some of the nonprofits these days. Obviously, they're experiencing quite a bit of an uplift in their taxes and financing costs. Does that present even more opportunity or your IRRs on capital investment, improving because of what's happening in the broader market? Is it too early to see that in common?

I think it's a little too early to see that, yet we would think maybe over time, that does have an impact. But our capital investment program more opportunity-driven in the market, and they're driven by market opportunities, whether it's expanding inpatient capacity, expanding a program, the ability to move share with a physician group. So I won't really say it's influenced by the competitor dynamics yet, but it's more of what we see the opportunities are. And over time, if they throttle down, then that may present more opportunities for us.

And the company chose to delay giving guidance, not that you've always done it in the third quarter, but the last couple of years, you did a little earlier. Maybe just take a second to say what you're looking for that you think you'll have in the fourth quarter? How much of it, frankly, was just the experience of this year where you had given early guidance and then there was a change in the first quarter. Is that a big factor in...

I think all those factors came into play. There really would imply a level of precision that we just don't have yet, that we wanted a little more time to finish this year, a little more time to go through our detailed planning exercises. We gave some commentary about our outlook on volume and top line. But we are in an inflationary environment we hadn't operated in quite some time. And really, as we said, we've only had like 2 quarters that have been of a normalized period over the past 2 years. So we just want a little bit more time to assess that before we got too far ahead of ourselves and suggest a level of precision that we just don't have yet until we get a little bit more time and then we'll go through our detailed planning.

I mean I think some people maybe interpreted that as almost a negative, there's an unknown out there that could be negative. But is it just more we want to fine-tune it a little more...

I mean that's what I read out. We just want to be a little bit more confident before we give [ firmer ] guidance about our assumptions that, that's built on.

Okay. Well, that's great. I appreciate Bill and HCA for participating in the conference. Next up in here, I believe, is Acadia. So thanks so much again.

Thank you, A.J.