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

Good morning. Thanks for coming. A packed room I see this morning. We have Bill Rutherford, the CFO of HCA. It's going to be a hybrid presentation. So Bill is going to start with a few slides, and then we'll get into the most important part, which is where I get to ask questions.

Yes, I'd be happy to. I can run through slides pretty quickly, John, if that's all right.

Yes. Perfect.

So I'll just give you a couple of overview, obviously, call your attention to our forward-looking statements. I assume many of you are familiar with HCA Healthcare, one of the largest health care providers in the United States. You can see our mission is above all else, we're committed to the care and improvement of human life. We've been operating in our markets for well over 50 years, and we're an important part of just the community infrastructure of delivering health care in those markets. Our goal is to create a large integrated delivery system to be the provider system of choice in the markets that we operate in. And we operate in some of the -- what we believe are the fastest-growing, most attractive markets in the country. Today, HCA consists of over 180 hospitals, roughly 2,400, 2,500 sites of care. We build out networks in our markets where you think it's anchored by our hospital network, supported by ambulatory surgery centers, urgent care, freestanding EDs, physician clinics and building a wide array of provider services in those networks while we develop deep clinical capabilities inside those -- in those markets, and that allows us to meet a full array of patients' needs. And you see we encounter almost 37 million patients a year throughout the HCA network, 9 million emergency room visits and the like. And so we're an important part of the fabric of these communities. On average, we have about 27% inpatient market share across our markets. And you can see some of the markets that we operate in. We've been in these markets, mostly well over and close to 50 years in many of them. So we represent a significant part of the health care, and we take that commitment to those -- to our communities very seriously on there. I think the unique part of HCA is not only investing and developing our large networks locally but supporting them with the scale of our national enterprise. And we focused and have been doing that for well over a couple of decades. Parallon is our revenue cycle services. HealthTrust Purchasing Group is our supply chain and shared service environment. Sarah Cannon is our oncology organization. We have our information technology, but we're constantly looking for how do we utilize the scale of HCA to support the delivery of care of our local markets, whether that be through administrative services, whether that be through data, whether that be through sharing best practices across the enterprise, and that's really been a hallmark of the success of HCA over the years. We were fortunate that we bought the Galen College of Nursing closed on that late '19, early 2020, quickly becoming one of the largest educator of nurses across that. We have 14 campuses today, about 12,000 nursing students enrolled in our Galen College of Nursing. We anticipate putting a Galen College of Nursing campus in every one of our major markets. I think we'll add close to 7 new campuses across our networks in '23. So another example of utilizing our scale to, I think, support our local delivery systems. Our strategy is just to be the system of choice. I talk a lot about breadth and depth, breadth of our network, hospitals, surgery centers, urgent care, freestanding EDs, physician clinics that expands our geographic reach, gives multiple access points to our patients and gives different price points as well. And why we're developing the breadth of the network. We're investing in the clinical depth, which says that we can provide a full array of clinical needs as you hit the HCA network, and that's through our physician recruitment. That's through our capital investment program. That's through service line support that we have across the organization. And again, our goal is to be the provider system of choice in our markets. And this strategy has proven to be very successful for us over the years and it was critically important as HCA responded to the past 3 years during the COVID pandemic. Our approach is to build these large networks, you can see here. You can see we use this flywheel in terms of developing operational efficiencies, being the provider system of choice to our physicians, develop a comprehensive service lines, deploying capital to meet what we view as a growing demand, and it's delivered good results for us and to support that with our enterprise capability through workforce development, through technology initiatives, through, you may have heard us publicly talk about our recent engagement around care transformation initiatives, where we're really looking at new models of care on the floor, bringing technology to be able to predict patients' needs and activity as well. And that's really been an important part of our response in a post kind of COVID surge environment on there. And then bringing our scaled solutions. We're organized across 3 operating groups and 15 domestic divisions as well as our operations in London. And so that has been kind of our focus, making sure that we fulfill our mission by delivering high-quality outcomes, our financial strength of investing and being able to invest to meet the growing demand for health care and then really our operational effectiveness. So I went through that pretty quick just so we can get to questions, John.

You can take a breath. So it's a complicated business, but [indiscernible] or some pretty straightforward metrics. So let's just kind of go through a couple. So one thing that was a little surprising was in 4Q across the industry, surgeries were a little light, especially coming off of 3Q where people blame travel and things like that. So just -- I don't know if you've had a chance to get any insights into that? And are you seeing any catch-up in the first quarter as some of the channel checks are trying to indicate?

I can't talk to the first quarter yet. I think last year, whenever you're doing prior year comparisons, you really have to take into effect periods of COVID surge. So you had a COVID surge in the third and fourth quarter of '21, peaked in '22, you didn't have [indiscernible] disrupted year-over-year comparison. So we're looking at sequential trends as much as year-over-year. Sequentially, we think we had really good surgical growth sequentially, fourth quarter to where we had in the third quarter. And then also, there's all kinds of quarter-by-quarter trends that you can't overread. Over time, our -- the framework for HCA is built on around 2% to 3% equivalent [ of mission ] growth, 2% to 3% revenue per unit growth in terms of our top line metric. And I think we continue to see that opportunity to do that. Our overall demand in the fourth quarter was pretty strong. Look at our emergency room trends were up 11% year-over-year in the emergency room. So we've been -- and I think we talked about this in the call, '22 was like a tale of 2 halves with the first half of the year still dealing with the output and ramification to COVID, second half was a return to normal trend. So I think the surgical volume sequentially trends. We were pretty pleased with. A little wacky when you look at the year-over-year [indiscernible].

And there was a day, right? You lost [indiscernible].

Yes. We lost a surgical day too. So -- that's why my only caution is quarter-to-quarter trends are one thing, but over a period of time, we've seen, I think, good volume trends.

So agency labor peaked at a little over 11%, went into the 7s in the third quarter, went up sequentially in the fourth quarter, which is a little bit of a surprise, but your long-term outlook, where do you see that settling in?

So we were pleased with the labor trends we saw throughout '22. It obviously peaked on us in the first quarter of '22, mainly related to the Omicron surge we saw in January. And so we had to utilize a really high level of contract labor to meet that growing demand. And we saw that sequentially improved. We were pleased with how we closed the year on that. We have a significant amount of focus on just the labor environment, improving our recruitment, improving retention, reduce turnover, looking at capacity management through length of stay and part of our care transformation initiative looking at new models of care. And that showed progress through the year kind of thematically, when we think about it. So we're pleased with the labor trends. We're not out of the woods yet. We think there's more room to improve, especially the temporary labor. We're not to our pre-COVID levels, but we're significantly better in the second half of the year than where we were in the first half of the year.

Professional fees are a pain point this year? Maybe talk about the context of that and then what's being done to soften the blow?

Yes. So for references, those relate to professional fees for the provision of hospital-based services. Think about emergency room physicians, anesthesiologists, hospitalists and the like. Most community hospitals contract for the provision of those professional services. Oftentimes, you end up having to pay a fee to subsidize those services. Some are through regional physician groups, some are through some national groups. And as you can -- might imagine, their cost structure is under pressure as they have wage inflation. And sometimes their revenue model is under pressure as they've gone through an out-of-network to an in-network type of model. And they will have to come to their host hospital asking for consideration of increased subsidy and increases [ their ] cost. And so those costs have been under pressure of late because of those dynamics. And we have to respond to it. We have a variety of different ways to respond to those. But they are trending a little higher than historically they've trended, a little higher than our revenue trends, but we can manage it within the overall context of our revenue. We have some of our contracts and joint venture arrangements where we're looking at taking on a higher degree of participation in governance. We do some direct contracting where we may have the opportunity to RFP if we get a request that we think is higher than normal. And then we're looking at from time to time, can we internalize and employ those services. So we have a range of options when we do get some request for increased costs. But again, I think in the overall kind of context of HCA's cost structure, we can manage through that environment.

And just which -- is there a segment of that that's harder than other. I mean you've got ER doctors, you've got all kinds of -- you've got hospitalists, you've got neonatologists. So which area is seeing the most pressure?

Often -- you're kind of contracting oftentimes, not all the time with the same firm for those different functions in a facility. So emergency room, anesthesiologists, I would say, would be the 2 functions inside a hospital base that [indiscernible] probably the most under pressure. Neonatologists are unique, radiologists, pathologists, intensivists, radiology and the like. But I think today is probably centered around emergency room and anesthesiology.

In the context of higher ER volumes that we had?

I think so. When you just think about -- I mean, they have high labor costs going up, so we can appreciate that and then they've got revenue pressure. So they -- and we have to have the provision of those services. So it's important that we have a stabilizing force on that. So it's just [ something ] we're having to manage through. And again, I think we'll be able to manage through it okay.

So you mentioned that you want to have a Galen School in every one of your markets, just kind of where are you on that effort. And then when do you think Galen starts to be a good guy in terms of easing some of the supply crunch?

Well, I think it has been a good guy. I think it will be more of a good guy using your [ terminology ]. So I think we're about up to 14 Galen campuses, 12,000 students in there. I think we have plans to add about 7 new campuses this year, probably a similar amount in '24. And then we'll incrementally go on. And I don't know what the enrollment will eventually get into, but I can see it getting up to 18,000 to 20,000 students. And [ do you ] think there may be 2, 2.5-year graduation. So are you -- [ can you ] be at a point where you're graduating 6,000 to 7,000 students a year potentially? We're not there yet. But over time, we're really pleased with that team. We're really pleased with the performance of that. It's been a nice strategic alignment. If you think about it, we're one of the largest employer of nurses. They're one of the largest educator of nurses. So you can, I think, just see the natural strategic fit between the 2 organizations.

So some of the not-for-profit hospitals, we had [indiscernible]. They've had some success with joint venture developments where you relocate, say, 20 psych patients and build a spanking new hospital and they run it. Same thing with IRFs. Just talk about -- you guys don't talk about your behavioral very much. But is there a longer-term view that maybe you could do something a little different with those patients? Or do you think it will continue to be what you've done always?

Well, we have -- I think the number is right, 65 dedicated behavioral health units across HCA. We have built freestanding behavioral health hospitals. We have [indiscernible] we've got, I think, 2 more under construction right now. We have, I think, behavioral health capacity in every one of our major markets. So it's a service line we've been investing in as a period of time, being a full-service health care provider having some behavioral health capacity is important. The investment goes by cycles based on the needs. I still think in behavioral health, there's a supply and demand imbalance. And we still have behavioral health patients in our emergency room, and we want to make sure we have the adequate level of behavioral health services to be able to treat those. So it's a service line we continue to build and grow into. During COVID, some of that was interrupted just like other services lines. Labor market has been a little bit challenged. So we want to make sure we're thoughtful about how much further investment we make in there, but the services that we do have, I think, provide a good service.

And you say the same thing about IRF? Maybe talk about your IRF...

So we have inpatient rehabilitation unit, similar growth in that area with deregulation of CON in Florida. We're adding inpatient rehabilitation units across the state of Florida. And again, it's just been part of our network development to make sure we have that capacity where necessary in key markets.

So one of the points that investors have, I think, been increasingly focused on recently is this PHE is finally coming to an end and the Medicaid redeterminations. You said before that Exchange patients are better for you than Medicaid patients, but just kind of talk about what modeling, if any, you've been able to do in thinking about the impact...

Yes, we were beginning to model and obviously study the other reports that are out there and trying to -- recently, states have begun to publish their plans for the Medicaid redetermination process, and there's some differences in there. But it's our belief and based on the studies we read that a fairly large percentage of people who may find themselves displaced through Medicaid redeterminations qualify for either employer-sponsor coverage or qualify for subsidies in the health insurance exchanges. So we're making efforts and others and partnering -- and looking to partner with others to help those population -- those individuals who may be displaced out of Medicaid, understand do they qualify for other coverage on there. And we haven't modeled it exactly. We haven't really factored in any major component of that into our '23 guidance. But there's a scenario there where we believe, again, if the studies are right, that we can qualify those people for employer-sponsor coverage or coverage in the health insurance exchanges. It could be generally directionally a positive thing for us. If [indiscernible] end up being uninsured, then we'll have to manage through that. But right now, I'm hoping there's a little positive trends we can eke out of the Medicaid redeterminations.

Okay. Market share, about 1 point a year. Where do you think that -- again, it's about gaining around 1 point a year, maybe plus or minus. So where do you think that -- what are the upper limits of that metric do you think?

I don't know, and I'm not so sure it's been a point -- I mean, the past 3 years have been obviously interrupted share and demand [indiscernible], hard to really get a read just because of all the [ covenant ]. If you look at pre-COVID, I think if you go back to probably 2010, we had maybe 23%, 23.5% share to 27%. So maybe 4 points over that decade. So it's maybe 60 to 80 basis points historically. I still believe there is room to gain share and a lot of our operational strategies that I talked about by building out the network, deploying capital, expanding different service lines are all efforts for us to gain share. And a lot of our service line strategies or clinical development, physician recruitment, physician alignment are all contributing to share gains going forward on there. Hard to get a read of the past 2 years because demand was so much interrupted and COVID influenced some of the publicly reported data. And our data lags a little bit. But we believe there's more share to be gained. We hope and believe that we're on a path to return to normalized trends that we were seeing pre-COVID. And if that does, then hopefully, we can continue to see share gains going forward.

The CapEx has been elevated well above depreciation as you've built out capacity. Where are you directing your capital today versus, say, 5 years ago? And where are you seeing the best returns?

One, we're very pleased with the capital program. It's a really important part of the HCA strategy to make sure we have the physical capacity to meet the growing demand for health care that we see in our markets. And we're running at really high occupancies across the HCA enterprise. So it's proven to be very productive for us on there. If you look at where our capital spend, a portion of our capital goes into routine, keeping everything current curb appeal and the like. If you look at the growth component of our capital, 3 primary channels, if you will, [ on investment ]. One is inpatient capacity. So we've got to make sure we have the bed capacity to meet the inpatient demand that we see. So that comes in the form of either campus expansion projects or new hospitals. I think we've publicly announced 8 new hospitals that are in the pipeline that will be paced over the next several years. And we have several large-scale campus expansions that will add inpatient capacity. So the number of projects are lower, but the dollars devoted to that are higher because they're high cost area. The second area is around our network development. It may be urgent care. I think we've quoted, we have over 60 freestanding emergency rooms that are in our development pipeline as part of our build-out of that service line, maybe imaging centers and the like. There's a lot of outpatient network development in our capital program, but it doesn't consume all that much dollars amount. And then the third area is around in support of our service lines. So it may be expanding the neonatal intensive care unit, maybe expanding a surgical suite, maybe expanding a robotic procedures through robotic purchasing. It may be through expansion of our emergency room and the like. So inpatient capacity, network development and support of our service line initiatives is where our capital is. And we've been pleased as we've deployed capital. We've seen growing returns on invested capital and especially when you spread between our cost of capital, it's been very productive for us.

Great. Just taking a step back. Let's say, COVID had not happened versus obviously COVID happened. Where do you think the organization is today versus if COVID did not happen? What are the permanent strategic shifts, if any, that have been necessitated by the pandemic?

I think we're still assessing that. I mean we're trying to harness some of the learnings we had during COVID. We are extremely proud of the organization in response to COVID. We met our commitments. We met our commitments to our communities and our communities to our employees, to our patients. And so we were able to return $6 billion of our government funding. So I think we met our commitments to our constituencies. So we're really proud of the work HCA did during COVID. And I think in many respects, we're coming out of the COVID period stronger than we went into it. And whether that be to try to identify where can we focus the organization's attention, how can we deploy automation and technology more effectively. During COVID, you were kind of forced to innovate and automate very quickly to be responsive to that. So we're trying to bottle that and harness that through automation investments, through where we've talked about our care transformation initiatives. We're in a better position to be able to deploy some of those new models and the like. Sharing best practices has been an important learning during COVID that we're continuing to do in many aspects of our operations. So -- and then I'll tell you financially, the balance sheet is in a much better position today than we were even after we returned the government support.

Yes, it's an interesting conversation to get both sides of the value-based care argument. The payviders always point to reductions in hospital days per 1,000 avoided ER visits, where when we hear from you or from companies like you, you describe value-based care as more fee-for-service with a kicker for something like readmissions or avoided hospital infection rates. So how have those contracts evolved over time with your managed care in front of me -- in terms of how you structure upside for [indiscernible].

The term value-based care gets used a lot. And people have different perspectives and maybe their own definitions of what that does. To me, value-based care is delivering the best health care in the most efficient way while delivering the best patient experience. And that's high-value health care. And that's what HCA is focused on is delivering high-value health care. Sometimes value-based care gets -- use the [ synonomous ] contracting structure, right? Are you fee-for-service, are you incentive, are you delegated risk and the like? And they obviously coexist in there. So we have a lot of value-based care efforts throughout HCA. We focus on outcomes. A lot of -- in many respects, we take capitated payment through a DRG payment when you come through our hospital were a risk for managing. We do participate in various aspects of different payment arrangements, whether it be pay-for-performance incentives and contracts, whether it be some episodic risk in the [indiscernible]. But we don't see that moving at any great pace on there. We do participate in inner partnerships with payers and other physician groups to move up that chain. But largely, our effort has been focusing on making sure that we're delivering the best clinical outcomes in the most efficient manner while delivering the best patient service. And as we do that, then we'll be prepared to see as the revenue models evolve, how do we participate in different revenue models.

So one of the -- and it's admittedly small, but one of the emerging models is that you could theoretically take 100 to 150 DRGs and actually make that an extended homestay and avoid the -- with the use of all kinds of technology and partnership. Is that something that you would see HCA leaning into? Or you think that's something that you're...

If you're talking about hospital-at-home movement or home -- So we bought a home health agency in -- during COVID, and we're integrating that into that. And we do see more services moving into the home. And that was part of our foray into home health as we can use that as a foundation as services do move. I don't know the pace by which some of these initiatives will move up. I think the hospital-at-home initiative is interesting. We are participating in a few pilots I'm aware of, but we're not making big bets in that area. So we're prepared if the marketplace has a demand for that, we can move into that. We've got the network capability to do it. We'll have a few pilots, but we're not making major moves into that at this stage.

You're answering my question so fast. I'm going to have to [indiscernible].

That's my goal is to leave you speechless [indiscernible] ask any questions.

I got one more, and then we'll take -- so a lot of press about the No Surprises Act. And then just the fact that you can go into a hospital, a hospital community network and then it's crazy like the ER group may be out-of-network and then [indiscernible] these bills. And that's obviously something that try to be rectified. But how does that on a scale of 1 to 10 for HCA, how do you guys think about that?

Well, we, as HCA, are an in-network provider, I can only think of a handful of contracts that we don't participate in. So that hadn't really been that big of an issue for us because we're largely in-network across our footprint. It does factor into the hospital-based physician space where they were maybe many of them historically out-of-network. We work with our hospital-based physician [indiscernible] in-network because you're right, the patient really doesn't distinguish that on that. So we've been working with them over the years, but it's still a factor in there. And they have to be paid fairly for their services, but also be responsive stewards in the community. So the only way I see it has impact in the short run is a revenue model may get compressed. And as I talked about earlier, we see that in the form, sometimes increased subsidies, but it has yet to be really a material factor for us.

And let me repeat the question to you.

Can you please comment on your IT spending for this year? Are you spending more on technology than you did last year? Any areas where you're going to be investing more in? Any areas where you...

Question about our IT spending, are we spending more this year than last year? And the answer is yes. We have major initiatives in our technology arena. It's a really key part of HCA. You may have read we entered into a partnership with Google. We are undertaking a journey around our core clinical systems. And we're making significant investments around kind of big data and trying to explore where does AI have a role for us in there. And so we've got multiple initiatives out there that are really focused on some of our care transformation initiatives, sometimes around predictive analytics, moving data to the cloud as well enhancing our clinical data systems.

Your budget will be up this year versus the past?...

It will. And we actually called that out on our call of some special investments we're making. But yes, we're investing more next year in IT.

So it was interesting you showed all the different pieces of HCA that don't necessarily get a lot of sunlight with Parallon and your -- which of those -- your GPO, which of those would be the most financially meaningful to the company of those various things?

We love all of them equally. So let's just take HealthTrust. HealthTrust is a great organization. It not only has a group purchasing organization. It's actually got a clinical education organization. It's got a shared service environment. It does all of our warehousing and distribution, critical to the operations of our network and is a great GPO to probably 1,000 other hospitals across the United States. Parallon is a revenue cycle organization, liquidates probably $60 billion of revenue across HCA footprint and serves others as well, I think, best-in-class in terms of service they provide and cost of collect on there. So those 2 -- those are 2 big enterprises that are important competitive advantages for us, but they also contribute very nicely to the organization.

All right. With that, we are out of time. Thank you.

Thank you, everyone.