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

All right. Let's get started a little earlier here. We've got HCA here. So I'm Scott Fidel, I'm the health care services analyst with Stephens. Thanks, everyone, for joining us. I know we're getting to the tail end of a long 3 days. So we're really delighted to save some of the best for last year. And clearly, one of the key local companies here in Nashville. So joining us today, we've got HCA for our next session. HCA is the largest for-profit operator of acute care hospitals in the country. HCA has 182 hospitals, and the company also operates an extensive network of 2,400 sites of care from their ambulatory network. In 2021, HCA oversaw nearly 36 million patient encounters last year. And joining us from the company today, we've got Bill Rutherford, Executive Vice President and CFO; and Frank Morgan, Vice President of Investor Relations. So first of all, I want to thank you guys for coming.

Very happy to be here.

Really appreciate it. Great. Bill, I thought maybe if you just want to start out with some high-level commentary in terms of give us some of the sort of key messages in terms of what HCA is focused on here as we're sort of wrapping up the year and looking out to next year?

Yes, pretty comfortable comments that we made in our third quarter remind everyone. We've only really had about now 6 or 7 months of stable activity that's been -- I'm seeing a COVID surge. And so we're kind of using this period of time to make our observations. There's probably 3 or 4 I'd share with you based on what we've seen after the third quarter is 1 that we're encouraged with the demand for health care that we're seeing in our markets. Our volumes are stable. We're actually seeing growth and pretty nice growth of non-COVID activity that we saw in the third quarter. I think we're up a little over 6.5%. Year-to-date, we're pushing 3%. Payer mix and acuity of that is stable as well. So I mean, that's a really important kind of area that we continue to evaluate, especially as we turn the calendar, but we're really encouraged with what we're seeing in the demand area on there. So that's a key takeaway for us. Obviously still early. We're going to have to see how a post-COVID environment shows itself, but we see a lot of good activity in our markets. Secondarily, we see it, for us, the labor market improving sequentially, just like we thought we would. We know we had labor pressures earlier in the year. Our contract labor was down almost 20% sequentially from Q3 to Q2. Our recruitment is up. Our turnover is down. And so I think our initiatives and our team's focus around the labor environment, we're starting to see signs of that. We're clearly not out of the woods yet, but we continue to see some sequential improvement in the labor environment. So that's a very positive trend for us as well. Third, I think maybe obviously, inflation is real. Just like every organization, we're having to deal with inflation, dealing with wage inflation, potential pressure around supplies, other operating utility costs. And we have multiple initiatives to try to respond to that inflationary trends that we're seeing and a variety of different resiliency efforts so we can talk further about, if you like as well. And that's going to help, we believe, help buffer those inflationary trends. And then lastly, we still see good prospects for growth. This year, we're going to invest probably $4.2 billion of internal capital, and that's at an all-time high. And tell people -- take that as a sign that we see opportunities to deploy capital to continue to meet growth opportunities in the market. We continue to build our networks, as you mentioned, around our facilities, so 2,400 sites of care. On average, we have about 12 outpatient centers for every hospital. If you looked at that 5 or 6 years ago, you might see 6 or 7, and we see activity in there, whether it be expanding our urgent care footprint expanding freestanding emergency rooms, physician clinics, imaging, even ambulatory surgery centers. So we continue to focus on developing the network, and we anticipate seeing reasonably good growth opportunities for us going forward. And the last thing to say, the company has coming out of COVID, we think and mostly better positioned when we think about competitively, when we think about our reputation in the community and clearly financial. And so I think we're positioned well to kind of go forward. We're obviously in planning and turning the calendar for '23 and everybody is focused on our commentary for '23. We're still in our planning process. So we're going to come out in January and give you our details. But kind of those are the broad observations that we have, but that's at this point in the year.

All right. Great. Well, we'll try to drill a little bit to the extent we can into all those things. So maybe let's start with that, just the inflationary backdrop. And clearly, on the third quarter call, when you guys said, clearly, inflation is real. Everybody listened and no surprise there. We all know that inflation is real, but it's still resonated. I think when you guys said that, we've got a few more weeks have evolved. We're halfway through the fourth quarter now. Any insight into how you're thinking on that sort of overall inflationary backdrop has evolved since then is really the thinking of where we are in it pretty similar? Or have you been seeing anything that's either, either favorable or concerning relative to that baseline even a few weeks ago?

Well, no. Not a lot of time has passed since that point in time on there. But if you think about where inflationary pressure shows itself in a couple of areas, clearly around labor. Fortunately, we have the reduction of contract labor that has allowed us to reinvest and be responsive to our base wages. And so we're pretty pleased with where our overall labor trends have been. Our supply cost, we really experienced really solid supply expense trends this year. It's primarily because during COVID we extended many of our contracts and probably 50% to 60% of our supply expense has been under firm pricing, and we've really been benefited by that this year. Obviously, it creates a little bit of risk as those contracts get renewed, that there's an opportunity for the inflationary to come in those discussions. But our teams do a really nice job of being able to manage through that. And you just kind of take the other operating expense, I think like everyone seeing either in their business life or personal life, utilities is still growing at a faster pace than trend. We're seeing other operating costs. But -- and then in the context of HCA's cost structure and revenue, we think we've managed through it very well. And we have a host of resiliency actions that we are launching you paid attention to our calls in the past that we've talked about. It's around our labor and capacity. We've got things around increasing our recruitment levels, reducing turnover, managing capacity through length of stay better, and we've seen nice trends in that area. And then we have kind of what we call care model transformation, where we can look at help supplementing the care team, the different skill mix of providers so that we can be responsive to the environment that we're in. We have a host of resiliency actions around what I call next generation of shared services where we have consolidation efforts in certain support areas like laboratory operations, environmental services, plant operations and the like. And those initiatives continue to, I think, will be a nice buffer to inflationary trends. And then we've got really advanced analytics, we call it benchmarking, where we operate pretty well and probably the most efficient health care provider out there. But we see even more opportunities even inside our own kind of operations to either reduce variations, share best practices alike. So we've got, I think, a host of initiatives that we can launch to help buffer the impact of inflation going forward. And as we conclude our planning session for '23, we're going to kind of be putting a little bit more analysis to that, and that's what we'll talk to you about in January.

Understood. And is it fair to assume though at this point in terms of the rate of growth of inflation that obviously, there's been many areas where inflation has accelerated and has been higher. At this point, is there anything that is still accelerating? Is it more about that we're at these high levels? And how quickly we can sort of bring it down to more normal levels? And how much higher than normal it stays? Or are things still actually accelerating in certain areas?

No. I think it's the former. And obviously, we'll need time, but we're encouraged, we're beginning to see some of the national inflationary trends come down. And I think perhaps not at the pace we want. So I'm hoping this year was a high watermark in many of those areas. But there's still uncertainty out there in the marketplace with just how the overall economy is going to behave. And that's what we're trying to be prepared for. And I think where it occurs inside of HCA that we've got I think a pretty good track record of being able to respond to the environment that presents itself. We obviously did that during COVID. We've done that in other cycles. So as a management team, we have a high degree of confidence we'll be able to respond to that. But my hope is we have seen a high watermark, and we can see some settlement of that, but it's still there. I mean you can't run from it. You guys are seeing it. We've seen in a lot of aspects of it, whether it be professional fees, supply chain utilities. And again, I just hope over time it will continue to moderate.

Got it. I'm sure we'll go back to expense trends. But I did want to just talk over to market share dynamics and what's going through the latest 3Q deck. Nice job, Frank. That was good. And you had your latest estimated statistic on market share, which looked at around 27.2% across the enterprise. Maybe give us some insights into as you sort of have done your ongoing analysis how you think your overall enterprise share has been playing out this year? And any insights on a geographic perspective in terms of where you feel like you've been gaining or areas that have become more competitive.

Yes. And that 27% is a composite of markets that we track. And just for clear, mostly inpatient shares that we track. If you look at market share for us in 2011, say it was 23%. So just to give you a little bit directionally we've grown that almost from 23 to 27 sometimes pushing 28%. Our data is 6 months in arrear -- and so it's hard to assess market. It has been hard to assess market share gains during cohort because it's hard to parse out what's going on in the market and COVID on there. But as a general statement, we believe we've continued to capture share in our markets. We think we're well positioned competitively. We're continuing to invest into the markets with sites of care, like I talked about and program development. So we're hopefully, we're going to continue to see that trend of market share gains. It's been broad-based. I mean there's -- I think the number we've said -- we saw 2/3 of our markets grow share over the past 12 to 24 months. And that's pretty good performance, just given the backdrop of the demand changes we've had over that period of time. So we think we're well positioned to continue to gain there. Most of our growth strategies are around how do we capture share. Fundamentally, historically, we've seen almost an organic demand for inpatient services hovering around that 1% to 2% level. So if we can maintain share, we should be able to see growth at that. And then if we can capture share, hopefully, we can see growth north of that. But that's -- it's kind of what goes into our business planning exercise coming from a combination of capital deployment, program development, just on the ground execution by our team, but we're pleased with our share with [indiscernible].

And it would seem like this is -- the opportunity set is pretty right. It feels like looking out to '23 from a share perspective, just from at least just looking at the financial condition, right, of the peers. I mean every single day, we see a large system printing a pretty significant operating loss, right? Clearly, there's been some pressure on you, but you guys are still trending at 20% adjusted EBITDA margins. We don't really see that out there in the acute care industry. And then across post-acute other areas, obviously, there's been a lot of pressure, too. So I know that you guys are disciplined in capital stewards, but what's your sort of psychology right now around being tilting to being on offense a little bit more because of the backdrop as compared to always still wanting to deliver the margins that you're targeting?

Well, absolutely. I mean, our teams are focused on executing on an array of different growth initiatives. And I can't say yet we've seen the struggles of some of those systems that you talk about necessarily materialize, but we think we're positioned very well to continue to capture opportunities as they present them as well. And that may be, again, around program development. That may be around physician recruitment and may be around capital deployment. And so we're continuing to be focused as we have been for a long, long time to finding opportunities to grow, to increase our position in the markets and hopefully that results in increased share going.

That's interesting, though, that you said you haven't really seen a change in behavior that much from some of these competitors, particularly, I guess, on the nonprofit and academic side. Why do you think that is? Is it just a matter of time? Is it that they...

Well. I don't know, but I think this is relatively new. And everybody is coming post COVID. My sense, many of those systems were being supported by some of the government funding that was occurring during COVID. And as you know, we returned $6 billion or repaid early $6 billion. And I think now that, that has kind of maybe gone away or at least slowed down. The realities are with them today. And so it takes a little bit of time to respond to that. So that's why I don't think that we've seen empirical data. But it just -- it would make sense that over time, we see some changes in behavior, but I just don't know how that's going to manifest itself.

And probably the key way that it would ultimately, we think would be manifesting it would just be around labor competition or is there other areas too?

I think there's 2. If we can see the labor market stabilize. There were times during COVID, you saw maybe some activity by some of our competitors that may not have made sense to us in terms of that. So that may rationalize a little bit better going forward. And then historically, were shown itself just in capital investment. As you think about if they're dealing with operational struggles or if their investment portfolio is under pressure, does that eventually slowed down capital spending on their part, and it gives us the opportunity to deploy capital to capture some growth. But again, that takes a little bit of time to show itself.

Okay. Maybe we could drill a little bit just to demand dynamics for Vic -- got a couple of questions. I wanted to ask you about that. First, if we sort of look at the bigger non-COVID bucket of demand in terms of utilization, maybe talk to us there in terms of where you're seeing more recently, any signs of acceleration or deceleration that are sort of notable relative to your expectations when thinking about key types of services?

Well, first, one level, we have this belief that it's going to continue to be a growing demand for health care services in our market. We've been in our markets for a long time. If you look 10, 20 years of historical kind of trends, there's this growing demand for health care. COVID obviously put an interruption in some of that demand. And so we're kind of assessing in a post-COVID or at least a post-COVID surge environment. We have a belief that those historical demand patterns will return. And that's what we're waiting to see, and that's what I opened with, we're encouraged with what we've seen so far with that non-COVID environment. And all the indicators that we look at when we're looking at population growth in our markets, we're still in a full employment basis in most of our markets. We're seeing a lot of growth. We operate half the company in Florida and Texas. We know there's been a lot of people moving into those states and so if you spend any time in Nashville, Nashville's booming in terms of activity level, and we're well positioned to capture that. So that's some of our macro beliefs and we're beginning to see that, I mean. It doesn't always return at a straight line pace, if you will. But we have this belief that there's reasonable demand in our markets, and we're well positioned to capture it. I think on our third quarter call, we talked about that, that we could see 1% to 2% inpatient demand going forward right now. And we see outpatient demand probably growing a little bit faster than that, perhaps in the mid-single digits. And so if that does materialize, that's a good output for us in this time. It's hard to really pinpoint yet markets or service lines. Most of the returns we've seen so far have been, again, fairly broad-based. There's always -- we operate in 42 markets. So there's always markets that have some degree of variation in it. But in most of the places that we're operating, we're fully open. We've got good macro trends. And again, so far, we're at least pleased with what we've seen through the third quarter.

Okay. And I wanted to touch on the, the long-term shift from inpatient to outpatient and sort of how you're thinking about the rate of change of that, right, at this point. I mean, clearly, there's been sort of the consistent multi-decade sort of backdrop. And then we had some acceleration, pull forward, whatever we want to call it, COVID type of dynamics that played out that seem to put a bit more acceleration around that, also some policy dynamics, what CMS was doing with the inpatient-only list, for example, and things like that. And that sort of had a meaningful effect, let's call it, over the last 12, 18 months. It feels like maybe it's sort of normalizing right a bit right now, possibly and interested if you think that's actually true. And just how you're thinking about sort of reversion to at least the normal level of rate of change next year.

I've got 2 things. There's always been this migration in outpatients. So just part of the trend. And historically, there's been new procedures [ find the inpatients ]. So it's just part of the cycle. There's no doubt over the past 12 to 24 months, we saw an acceleration of that, but it was principally and primarily in orthopedics and total joints. We did see a significant acceleration of joint replacements move from an inpatient setting into an outpatient setting, probably 70% to 80% of joint replacements now are being done in outpatient setting. But our overall orthopedic business for us in HCA has grown. So net-net, we've grown, but there has been some shift in that area. I think that's mostly behind us. So I don't know right now that we see another area that is at risk or that potential shift as fast as what we saw during COVID. I think there were some dynamics in there and primarily related to advanced anesthesia practices and pain management. Interesting, many of those orthopedic procedures that did shift from an inpatient to outpatient. They're still being done in a hospital-based outpatient centers. They're being done in the same OR suite, if you will, just for surgeon preference reasons out there. It just happens you're going home at 6:00 at night versus spending a night in the hospital the next day. So that definitely has been a factor for us this year. And when we compare kind of baseline '19 to where we are now, adjust, we have to adjust for that inpatient move that's occurred. And so there may be other services that have some migration. But I don't know right now, I see anything that has the type of trend that we saw with joint replacements over the past 12 to 24 months. We'll say that some people kind of correlate that, that are you going to see a correlated decline in inpatient activity, we're still running some of the highest occupancies in the inpatient side that we run. On average, we run about 72% inpatient occupancies. So there's other inpatient activity that tends to backfill when those shifts do occur. So...

Yes, maybe even speaking about some of that other -- so there's, let's call it, the traditional sort of health care utilization, and then I'll just sort of bucket it as the virus related, right? It's not just COVID. There's -- everybody is thinking about RSV and flu is back in the conversation. It's like we never had flu before, right, but because we had in for a couple of years. Maybe give us an update if you want to sort of address just the virus sort of group together in terms of how you're seeing, how that's influencing both I guess, some of the utilization volume stats, but also if there's any effects on the staffing side, too.

Yes. I mean, one, we and I think many providers have become a custom over the past 2 years to deal with cycles of presentations of different conditions. COVID volumes, I'll start with that has been relatively stable since we went through the Omicron surge earlier this year. And that's been really, really stable, at least for us in terms of our inpatient activity. Obviously, there's still a lot of community activity, but it hasn't necessarily resulted in hospitalization. We are hearing increase in RSVs, that's principally in the pediatric line. We don't have that many pediatric, we got I think 6 or 7 dedicated pediatric hospitals. But clearly, that's activity for us in the fourth quarter. I can't provide any numbers for you -- and yes, we are hearing some increased activity of Flu, but they tend to be very cyclical. They'll come in for a month or 2, and we can manage it. It doesn't really change structurally anything of how we're positioning the company or how we are going forward. There is some maybe interim risk with -- if you do have a flu that you have to manage your labor capacity a little bit different and make sure we have the clinical workforce to be able to deal with it, but I haven't heard of any material issue with that at this stage.

Okay. Maybe shifting from just sort of pure demand and volume over to mix a little bit. Clearly, we've now in this -- had this higher acuity, average acuity, dynamic in place for most of the pandemic. Is it -- the question is that sort of the new baseline, where does the new baseline settle out relative to pre-pandemic, right? Obviously, it was informed even higher from really sick COVID dynamics that have probably come in, but it stayed somewhat higher. What's your view on that?

Well, our view is that -- and again, we're in need time to see how this plays out. And so we've got a relatively short period of time to assess it. But our view is we can maintain the acuity levels in the non-COVID business that we've seen. At a consolidated level over the past couple of years, acuity has grown for a couple of reasons. One was it was a low acuity business, if you will, that maybe stayed away that got deferred. So we were left with very high acuity patients. I think COVID was a piece of that. But our goal turn coming into this year, and I think as we go through our planning is everything we're doing is to try to continue to grow high acuity services and to make sure that we can provide a full array of services. So we believe we can today, mostly maintain those acuity levels, and that's what we're trying to do. And thus far, we've been able to do that. When I look at acuity growth in our non-COVID business, we're still seeing some growth in that as we went through the third quarter. And then you couple that with payer mix, we were also benefited during COVID a very favorable payer mix. A couple of reasons that potentially drove that. Number one, is the Medicare population that may have stayed away from a health care setting vulnerability, but we saw a significant -- reasonably good increases in the health insurance marketplace. And we're very encouraged now with the enhanced subsidies continuing for the Affordable Care Act that becomes a support structure for people going forward on there. So those 2 have been positive. So again, we went this year aiming to maintain both the acuity and payer mix, and we've mostly been able to do that this year. So that's -- those are positive trends for us.

And I wanted to follow up just on the internally driven sort of element of the higher acuity. And you have a multiyear, very broad multibillion dollar annual investment program in your facilities, in your service lines. I'm interested, though, just in terms of how some of the trends have been evolving post pandemic. Has that influenced any adjustments into service line sort of prioritization in terms of how you invest or not...

No. I mean even before we're focused on making sure we can provide a full array of services, and we do assessments of where we are, where there's opportunity in the markets. And then maybe around cardiology, expanding our cardiology capacity into electrophysiology, structural heart, TAVR programs and the like. We have opportunities in emergency services to evaluate expansion of our trauma programs and our women's and children's services, looking at where we have opportunities to expand Neonatal Intensive Care Units and things of that nature. And actually, I don't see that changing. We'll still do an assessment on there. We do want to make sure that we have a good read on the demand and how that returns going forward. But so far, it hasn't really adjusted our strategy of being able to invest to continue to grow high acuity services.

Great. I want to move to the next topic, but let me stop there and see anybody have a question out there? just raise your hand if you do. So let's move back towards that supply and labor side. And I just want to ask you a straightforward question that I would just like to ask and not too long winded just a...

I want to give you a straightforward answer.

Exactly. As you look to '23 from where we are right now, would you expect the labor dynamics to improve to pretty much stay the same or to worsen.

Everything we're doing is to continue to see improvement in the labor environment. But like I said earlier, we're not out of the woods. There's still a lot of macro dynamics at play, and we have to be responsive to the marketplace. We have an obligation to make sure we've got the capability to deliver services when people come to us in need. So right now, especially when we saw the high watermark in the first quarter, primarily because of these COVID surge, we've seen incremental improvement in there. But we've had to make adjustments. We've made market adjustments to our employee workforce. We're investing heavily in our recruitment in our retention. And I think that can help reduce the need for contract labor. But if volume begins to kind of return and fluctuate and we don't have the workforce, we'll respond appropriately on there. But I think as a directional, we would expect and want to see the labor market continue to improve. But we clearly have an obligation to be responsive to the market, and we'll continue to do that.

Okay. Chris.

I just wanted to ask along those lines from a rate perspective. Is there any reason to believe that, obviously, there's a lag that rate increase is going to keep up or inflation over time.

Wage rate? Is there any reason a wage rate won't keep up with inflation.

You'll be able to raise your fees.

Pricing, not moving...

Sorry, yes.

Well, back up, we -- I think reality governmental pricing will fully reflect inflationary trends we're seeing and it lags. And so yes, there's -- we're in this industry where Medicare is not going to necessarily pay us the full inflationary pressures we're seeing. So that's why it's incumbent upon us to become more efficient in the services we care. We then look into our commercial payers, and we've talked about that publicly. We've had reasonably good conversations with the commercial payers, and they recognize the inflationary environment we're in. And we go to them asking them for consideration of that as contracts renew to get above trend pricing on there. And so far, we've had reasonably success working with those payers to get some recognition of that inflationary environment going forward. That clearly is a dynamic. Structurally, you can go through these temporary inflationary environments structurally, if inflation stays very high, then it does put a little pressure on us being able to get that recognized in our revenue rate. And so we have to deploy a host of other initiatives like is talking about and the resiliency efforts to offset some of that. But in this cycle we're in, we think we can manage through that.

And maybe just a follow-up on that, just in sort of thinking about from a weighted pricing perspective and payer mix perspective. I think that your view, at least at this point, is that you're expecting a pretty consistent dynamic right around payer mix. Is that fair?

Yes. That's right.

And then how would you say that's governed by an economic slowdown? I mean obviously, I think we're all still trying to figure out exactly in a post-ACA world, right, how much pre-ACA sort of payer mix shifts are -- have changed because you've got -- we have exchanges, we have Medicaid expansion, but that would still incline some mix changes or would it not?

Well, it could be. I mean if you start to see unemployment growth, people lose employer-sponsored health care coverage, we have something today we've never had in past cycles, and that is a safety net in terms of the subsidies in the marketplace. And so -- we have a belief that many of those people who, if they do lose employer sponsor covered would be eligible for coverage in the health insurance exchange. And we have a host of efforts that we would have a play to help support people explore options available to them. So it's hard to really assess that right now. So far, we haven't seen that dynamic play out. We're still really good employment numbers in our markets. But we believe today, there's something completely different than what we saw in past cycles, and that's the safety net. And I think that pertains good things for us overall.

And I guess one semi-related area would just be thinking about the public health emergency and the Medicaid expansion and redeterminations, which I think were all exhausted about talking about and it hasn't even started yet, right? And we were thinking maybe it would finally actually the PHE would finally get pulled away and it's not right. It looks like it's going to be going into at least the second quarter. I'm starting to ask whether as long as Biden's President, maybe the PHE just sort of stays in place. But for you, it creates, I guess, some level of trickiness just in terms of your budgeting, your planning guidance, right? If -- or will you just assume that basically the PHE is in place until where it is in the current sort of authorization level or how do you approach that?

Well, first, think about the PHE impact to us is primarily around some DRG analogs for COVID Medicare patients. With a COVID volumes really small, it's kind of not material to us. And then we know that PHE is a factor of when states might begin Medicaid redeterminations. We haven't fully assessed that Medicaid redetermination process. But right now, I'm thinking of maybe best case it's a push that if people are losing Medicaid coverage is maybe people who have income that would be eligible for coverage in the health insurance exchanges. And just for illustrative purposes for -- and generally, on average, for every 3 members that lose Medicaid coverage, if only one of those finds coverage in the [ health care ] exchange is basically net-net even for us. If 2 of those 3 find coverage in the [ health care ] Exchange, it could be a positive trend force. So again, we haven't finished our '23 assessment on there, but those are -- that's kind of the analysis that we're thinking about right now that I think right on Medicaid redeterminations likely a push, maybe there's some upside with it. But I don't know if I see a scenario where there's downside necessarily yet. But we'll need a little bit more time to see how states, one when the PHE expires. And then two, states will have some time to kind of enact the process. So we have a little bit of time to kind of further assess that.

Okay. And then one other piece, I guess, around mix would just be the mix shift to Medicare Advantage within Medicare, at least that's pretty predictable. I mean MA has been growing at a pretty predictable 8% to 10% compared to fee-for-service pretty much flat, right? But you sort of know what that trend is. Maybe talk about from -- to the extent that you have controllability and contract around MA, how that's been progressing and how, let's call it, the economics of MA business relative to traditional Medicare or commercial however you want to sort of frame it or have been evolving?

Well, from a price standpoint, mostly our MA pricing indexed to Medicare. So that basically is equalized for the most part. We're asking ourselves, should we have a little bit more on the MA just given the main piece of that typically where the MA comes into play is maybe around the utilization patterns. And so that's something we don't have great visibility into in terms of how utilization patterns are impacted more. In our markets that are heavy MA markets, we do pretty well that have historically been in there. But I would fully expect a continued growth of Medicare Advantage individuals going from the fee-for-service program into an MA [ managing ]. And we participate with those contracts. And I think we're -- I don't view that as a negative at this stage.

Okay. Let me just pause any question out there? Okay. Maybe let's go to contract labor-- always it's amazing it's half an hour, right? I asked about it. So just, I guess, an update on relative to where we left off on the third quarter call and expectations that you had embedded in your 2022 outlook. Any insights you can give us on directionality around both utilization and the rate components of contract labor.

Yes. I mean I think as I mentioned earlier, we are really pleased with the contract labor trends we saw sequentially from the second quarter to the third quarter, down 19%. About half of that decline was -- came from a reduction of average hourly rate and about half of that decline came from lower utilization of contract labor. We believed early on, we first see the average hourly rate because it was really at an all-time high in the first quarter, primarily a result of the COVID service that we had. And then we had to buy that contract labor to make sure we have people to serve our patients. And so we saw that stepping down and that indeed did materialize for us in Q3. We knew that utilization would take a little bit longer because the pathway for reduced utilization is improved recruitment, reducing our turnover, managing our capacity. And then we are really expanding and looking at supplementing the care team on that. So we saw our contract labor hours declined pretty well. We were, I think, 10.7% of our hours. We stated more contract labor were first and second quarter, we were pushing 12. it's still higher than we want, and it's higher than we were running pre-COVID. So hopefully, there's more room in that as we go forward. And our teams are working diligently on that. And again, I think the way to continue to reduce utilization is increase recruitment and reduce our turnover. And some of the things we've done operationally are all intended to do that. So we're hopeful we'll continue to see some improvement in that.

Okay. I want to ask a bigger picture question just around some of the shifts that we're seeing across the health care provider landscape and relating to the shift to value-based care and payers getting more engaged and external actors getting somewhat more engaged with Amazon. And I know we've talked about this on earnings calls, I think I may have asked about it before. But just to the extent that this is event sort of influences how the business is effective for HCA overall? I mean how -- it seems like there's a lot going on, but it's hard to sort of tell how much it actually impacts HCA or your thinking on..

There's clearly a lot of activity, and that's kind of our view now. We see a lot of activity. We haven't -- we haven't seen it necessarily impact us yet. Most of what we see and some just trying to define what is value-based care when you see it. What we're seeing now is probably more directed at the Medicare Advantage market, where you have organizations or physician organizations, getting a little bit more active in the Medicare Advantage market, maybe taking risk and trying to manage a population a little bit differently. So there is a lot of activity in there, generally sitting around primary care and access. And given our footprint, we have a lot of potential to play in that space. And we're trying to evaluate what is the right strategy for HCA going forward? And how do we utilize our existing physician footprint. We're what we call omnichannel with primary care. We have urgent care centers. We have primary care. We have OB, but we also have heavy MA markets that we will participate in. And from time to time, we will partner with a group that is maybe a delegated risk provider and participate on there. But we don't really have a corporate philosophy on that. Those tend to be more market-by-market nuance of what's going on. But there's clearly increased activity. And we're -- we haven't seen an impact this year. We're waiting to see where that -- where there might be opportunity for us. it generally is, again, around the MA area. We know there's a lot of valuation discussion and there I don't quite know how durable some of those models are. And so that's the one we have under evaluation right now.

And from the physician recruiting perspective, it seems like this is not sort of a -- is this even at the marginal side if things had an effect? Or I mean, United often gobbling up physicians, but still doesn't..

I can't say I've heard that, that many of our teams at that -- the move into that is affecting our ability to recruit positions. And net-net, we're adding to our medical staffs to support our programs and our expansion. So no, I've not heard any discussion by our teams that that's having an impact on our ability to recruit physicians.

And just want to make sure to give you -- to make sure that I understand relative -- correctly to relative to like from an M&A perspective, I mean, is it something where HCA would consider acquiring some of these base primary care providers? Or is it not necessarily at the top of the priority list, but could move up or...

I think there's a range of options if we chose to move into that, that it could be an M&A if we had an opportunity that we felt was a nice addition to our market position. It could be taking some of our existing physician footprint and trying maybe supporting them to be able to manage in that environment better or differently than they are right now. So I think there's probably an array of options if we chose to move into that in any big way that we could explore.

Okay. And I know we're getting out of time there, so maybe that to go transition just into capital deployment priorities and give us your -- I know you guys are pretty consistent, right? It's probably going to be a similar type of update that we're used to getting, but still very important in terms of how you're laying out your priorities of capital deployment.

We've exercised what I think a very consistent, disciplined and balanced approach to capital. When I think about the priority of our capital is first, invest in our existing markets so that we can meet growth opportunities. So we have that sized about $4.2 billion this year. We'll see where that size next year, but probably the structure will be very comparable on there. Second, we want to maintain the balance sheet in a very strong position so that we could be opportunistic for anything that may present themselves. We -- our stated leverage ratio on the balance sheet is to operate the company between 3x and 4x leverage, and we're at the low end of that. So that gives us, I think, a lot of capacity going forward. We do pay a small dividend, but it doesn't consume a lot of capital. And we've historically been a pretty active repurchaser of our own stock. We purchased $8 billion of our stock in '21 probably end up close to somewhere around $7 billion this year as a balanced allocation of capital. Our typical model will be to dedicate free cash flow to a share repurchase program. In '21, we had the opportunity to kind of -- in '20, we paused that. So '21 was about making up some of the pause. And this year, we were actually operating below our leverage target. So we took free cash flow plus that excess leverage to get to the low end, and we'll continue to evaluate that going forward. But I think all of that has been part of just a long-term strategy to deliver value over time. And I think our track record has proven we've been able to do that.

Great. Anyone want to take us out of the last question here?

Yes. Just on that, I guess, it looks like you guys have some bigger amounts of to the maturity, like 25%, 26% kind of what that's historically like on average, 3 and 4 years out or what you guys are thinking about paying that down.

Well, it is. I mean, just given our profile, historically, we've issued 10-year maturities. So almost every year, you may have $2 billion to $3 billion coming up for maturity. Our next maturities, I think, are in '24. And we found the market to be very receptive to us. We have, today, very low exposure to floating rate interest. But yes, we will have to deal with those stacks at some point. We generally will try to address those or begin addressing those anywhere from 12 to 18 months before maturity, and that's in our planning exercises right now. But we'll have to deal with those. But again, I think we're in really good shape. You may know we got upgraded to investment grade this year. And we've been able to push out some of our maturities. And we found the market to be pretty receptive. But obviously, with the interest rate environment is higher today. We were in the market in February. I think our blended rate was sub of 4%. And so we were very pleased with that transaction. And that's given us some runway over the next couple of years.

Yes. Great. Well, I think we're pretty much out of time. Bill, Frank, thanks so much for joining us today.

Thank you.