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

You probably know, but HCA is one of the nation's leading providers of health care services with over 180 hospitals and another 2,300 sites of care, surgery centers, freestanding ERs, urgent care centers, et cetera, et cetera, in 20 states and the U.K. Bill Rutherford is the Chief Financial Officer of the company, and thankful that you made it to Boston.

Thank you. Good to be here.

I guess I want to start with -- we'll go big picture, and then we'll try to take it down lower. But I think investors are still trying to figure out post pandemic, what is post-pandemic normal look like. Some of the shifts we've seen in care delivery, some sites of care ship, et cetera, sort of what's permanent, what's structural? What maybe got too far kind of what's coming back? The clinical labor market got incredibly disrupted and that's one thing we know that's coming back. So any sort of big picture thoughts on what sort of changing or firming up sort of post-pandemic we got?

No, it's a great question. We're all trying to figure it out. I think I'd answer it in kind of these themes that we talked about in our year-end con and '22 was really a tale of 2 halves for us. First half was still dealing with COVID and kind of the after effect of COVID. And the second half was what we believe is beginning of a return to normalization. So as we looked at the second half, there's probably 4 or 5 themes that we've observed that we're utilizing to carry into '23. The first one is we see recovery demand in the markets. We see good activity in terms of volume trends in the market. And most of our markets that we operate in, we're starting to see a lot of activity. Our emergency room continue to be really busy. Our emerging room visits were up 11% in the fourth quarter. And so we feel good about volume outlook, and we're seeing demand occur in the marketplace. We're seeing stabilization in payer mix in acuity, which is good. It's kind of our model is 2% to 3% equivalent admission growth, probably 2% to 3% revenue per equivalent admission growth, and we're seeing remaining positive and stable trends in the acuity mix. Labor market, to your point, was disrupted during COVID. We believe -- we saw sequentially improvement in the labor market in the second half of the year compared to the first half of the year. We're not out of the woods yet on that. So we're continuing to focus heavily on recruitment and retention and capacity management and the like, but we're pleased with the sequential improvement in labor, and I think there's more opportunity to settle that market. Inflation's real, we're having to deal with inflationary costs in some of our other operating expenses, but we can manage through that with some of our resiliency efforts and within the context of our revenue cycle. And then lastly, for HCA, our balance sheet remains strong. Our capital investments remain an important part of the growth strategy. So I think we're in the beginning parts of a return to normalization. We've said that we see the volume trends beginning to return to normal historical patterns. As far as structural changes, hard to call yet. We'll need a little bit more time. There has been some shifting of care. I mean everybody knows orthopedic joints have shifted mostly from an inpatient operation into outpatient. That shift has occurred, I think, mostly behind us. I'm not so sure outside of those other areas. We have judged to see any other major structural changes in the environment, and that's what we'll use '23 to continue to assess.

Got you. Appreciate that. So for 2023, in aggregate EBITDA guidance basically flat, but you called out about 4 or 5 points -- percentage points of headwinds from 340B and some out-of-period payments and COVID support and all that sort of thing. What do you think are -- if that guidance proves conservative, which was your -- has been your historic pattern for a lot of your tenure as CFO. What do you think are the 2 or 3 things that are most likely to drive it? Or what do you see 2 or 3 most important swing factors for the year?

I think probably one of the most important we've talked about this in our call is we can continue to stabilize the labor environment to make sure we have the labor capacity to meet what we believe is a demand that's in the marketplace. We've talked about [indiscernible] volume that we were unable to serve mostly because we didn't have the labor capacity to serve it. So our focus continues to be to ensure we've got the labor market to be able to serve that going demand. It's probably the #1 thing in response to your question, if we can achieve that better than our expectations, there should be some positive trends to that because there's demand in the market that we're unable to serve historically -- in the last half of the year because of that labor market. So as that begins to settle, that should be a positive dynamic for us. And we'll have to see where the inflationary environment settles. But if inflationary trends improve, maybe a little faster, which I don't know if they're going to but in our plan, that could be a positive trend. So those are really the 2 things I would call out.

Got you. And when we think about seasonality, I had some questions, people thinking about seasonality and trying to sort of build from 1Q '22 to 1Q '23? And then you have all of those things I've mentioned, plus a few others. Is it -- maybe if we just think sequentially from 4Q to 1Q, typically, there's -- you can back and see how historically [indiscernible] resetting. But sequentially, am I right? [indiscernible] modeling that way than trying to do the year-over-year.

Yes. I mean, our focus is sequential trends. Year-over-year just gets a little wonky. Depends if you're looking at earnings or if you're looking at volume, our belief is that we're going to return to historical sequential trends on volume. Obviously, during COVID period, those trends were interrupted. So if you go back to pre-COVID and looked at how volume would normally progress during the course of the year, there's no reason that I believe now should be any materially different than it was in a pre-COVID level. We'll have to see how that plays out. If you're looking at earnings, yes, you have to factor in some of these things that we've called out in terms of the Texas out of period that we recorded in the first quarter of last year. And the COVID support payments were weighted more heavier in the first quarter and second quarter than they were in the third and in the fourth.

But if I'm thinking 4Q to 1Q, I think the 2 extra items in my mind are 340B impact starts on Jan 1 and you divested a few things. And those are the 2 key besides the typical seasonality, you would see. Okay. Anything to call out on -- American division has Texas, the national division has Florida. Last year, just the EBITDA performance, the margin performance was better in Americans/Texas division. Is there anything as you think going forward in '23 specifically or beyond where the market dynamics are very different there that should drive differentiated performance? Or do you generally think get to a place where division performance looks pretty similar?

Well, it's a great thing about HCA is we've got a diversified portfolio. And that diversification is not only geographic diversification. We've got service line diversification we have some payer diversification. And that generally is an advantage to us. So in any one period of time, you have -- you may have one market that has more challenges than another market in one period, and it's kind of -- you manage the portfolio on there. So I think broadly, our markets are well positioned. There's -- each market has some unique circumstances that they're responding to that delivers results in one period and the next. As we've gone through '22 and '21, the marketplace was interrupted demand because of COVID, labor market disruption, each market was affected a little bit differently. But going forward, our fundamental approach to the markets remain pretty consistent, build out the network, make sure that we're deepening our clinical capability, support them with our national scale. And so hopefully, we'll get more consistent performance going forward.

And any specific outlook just around inpatient surgical trends? You've talked about over the last few years, in fact, particularly for Medicare, mostly Medicare, I think, maybe I'm wrong, but single joints having moved towards the outpatient setting. I think there is sort of an industry sense that surgical activity has started to pick up. You talked about just recovering trends in general, going back to the fourth quarter. I mean does that make sense to you that you talked about some of the labor constraints. Some of the companies have talked all year about labor constraints sort of impacting surgical demand. So does it make sense to you that, that should be sort of picking up? And I mean, is there significant leverage to you and your EBITDA forecast if things do continue to accelerate? [indiscernible].

Yes, I think so. I mean, I do think we see a continued recovery of the marketplace, and that should show itself in the surgical volume as well. We're actually pleased with the surgical trends we saw in the fourth quarter when you adjust for the surgical day. When we look at sequentially, if you look at year-over-year adjusted, we see good vertical growth. When you look at our inpatient surgical growth on a per surgical day, reasonable trend sequentially third to fourth, and there's no reason for us to believe why those trends and improving trends should not continue. And yes, the incremental case for us is a contributor for us just given the fixed cost that we have inside the system.

Okay. So I hope to hear Sam talking about clearance rate below in 2023. That EBITDA clearance rate that he points to. Contract labor, so I think everyone is listening to some of the national staffing companies talking about bill rates coming down. There's another national staffing company that puts out a demand chart. So there's some public stuff that everybody is looking at that both seem to be pointing in the right direction for you. How much contract labor, tip labor improvement is built into your guidance?

Yes. We expect continued improvement in the contrary labor. Going back to '22. It was a tale of 2 halves in contrary labor. We had really high utilization in the first half of the year. Our contract labor as a percentage of SWB was roughly 9%. It was improved in the second half of the year to roughly around 7% there. So we saw first rates moderate when we were no longer in a COVID demand. So -- and then we continue to work on reducing the utilization of hours as we can continue to recruit, the labor market settles, retention declines. We think there's more room to go in that. And we have built in expectations of continued contract labor. It's not as discrete. We generally look at our overall SWB on there, but we would expect continued improvement. I don't know if we'll get to pre-COVID levels in '23, but I think we can think we can continue the trend lines that we're on right now.

You made a point there that I think I've kind of shared like I get a lot of questions about the contract labor piece, and I'm always kind of pointing out, well, HCA has $7 billion a quarter of SWB and $400 million, $500 million of it is contract labor. So I'm very happy to see those metrics as well, but there are $6.5 billion where we've had to give inflation to states and rate increases is an important part of that equation as well. So on that other $6.5 billion or so, you've talked about turnover has been improved. Anything else just on the base wage rate on that core SWMB that is shaping up better, worse, different? Or you kind of just came through that annual wage cycle?

Well, we didn't make wage adjustments to our core employees to be responsive to the marketplace. Fortunately, we had a little bit of a pay for as we were able to decrease the utilization of contract labor. And overall, going forward, our planning assumption is maintaining our total estimate. There's a lot of inputs into your labor costs, your wage rates, your productivity, your utilization, skill mix to keep our total labor cost in line with our revenue growth. And into the backdrop of today's environment, I think that's a really solid result for us. And again, a lot of puts and takes into that. And so as contract labor continues to decline, we can reuse some of that to reinvest that will help reduce turnover, increase hiring and net-net, allow us to achieve that goal.

Got you. Can you remind us how you think recession impacts HCA revenue and EBITDA. I think Powell obviously speaking yesterday, the market was reacting to that. So it seems like every time the Fed talks now it's higher for longer, and I didn't think the market could bake in more recession risk than it has for the last 2 years, but it seems incrementally the one to do so. So just fundamentally, how do you think that impacts.

Well, I think globally, there's 2 areas it could impact us. One is if unemployment starts to rise, people lose employer-sponsored health care. Fortunately, today, we've had something we've never had before. And that is we've got subsidies in the health insurance exchanges that I think will be a buffer to that. Secondarily, there's often a lag of that because of [ cover ] on there. So we're not anticipating a major kind of volume impact as a result of that. But that's where it could show itself. But again, I think there are things in the marketplace today that we've never had before that created a reasonable buffer to that downside. And then obviously, the other side of that is in the cost structure. But I think we've seen the high watermark of inflation, hopefully. And maybe it doesn't come down at the pace we want. And we're able to manage through that right now. We manage it through on the labor side. Our supply cost trends have been really positive. We do get some pressure in some of our other operating expenses. So if those persist longer than we want, then yes, there's a effect to there that we'll have to respond to. And we've got multiple ways to try to respond to that environment, whether it be our resiliency programs we've talked about before, consolidation, some benchmarking, some reducing some variation. Our capacity management around length of stay is a response to some of that. So we've got multiple initiatives to try to respond if we stay in a high inflationary environment.

It's been my observation historically that material jobs recession creates an increase in the available clinical and so we've seen it. I mean our analysis looking at the last several cycles, has always been -- there's this maybe a little bit of top line pressure, but a lot of sort of countercyclical benefit on the labor side. Margins usually far less impacted than, I think, theStreet sort of initial reaction. I think that a couple of things you said earlier were interesting. So the guidance assumes stable acuity and mix. So the acuity piece is interesting because you've seen acuity pick up during the pandemic and the bear case was always there's no way that acuity can stay -- continue to stay up there. But it has. Some of it maybe is that the lower acuity stuff has moved site of care or maybe that's most of it. So talk about why you think that acuity remains elevated. Is that the primary issue you see? Or is there more initiatives and programs and where you're growing your...

It's all of the above. If you look at the revenue per adjusted admission, a lot of factors that will drive that, whether it be pricing, payer mix and acuity. And those 3 -- acuities are always the hardest one to predict. So we have to go a little bit on our historical performance to try to inform our view going forward. To your point, we did see good acuity gains during COVID, largely because of lower acuity services stayed away from the health care setting. And so we said if we can maintain that, that's probably a good output. But we may begin to see some lower acuity services come in. That's okay as long as it doesn't squeeze out the higher acuity services for us. But our view today is more informed with our experience that we saw in the last half of the year that our acuity as measured by our case mix was pretty stable. And probably a lot of factors that are driving it. Yes, we continue to invest programmatically in our clinical programs that continue to drive higher acuity services. I think there may be patient selection opportunities. If they're lower acuity is moving into other settings of care, and that helps us on there. So again, a lot of puts and takes on that. But if we can maintain relatively that -- surgical trends impact that, obviously. But if we can maintain around the level we're producing right now, that -- I think that's a good outcome for us today.

And then what about mix? I mean one of -- I think there's sort of this interesting observation. I mean I know the pandemic impacted this. But when we look at managed care revenue was up 9% in 2019, and it was flat in 2020. It was up 14% in '21. It was down 4% last year. So the CAGR is very nice, but it's like a tough comp and then an easy comp. So this year really sets up as an easy comp in terms of managed care revenue. I guess the most obvious would be -- if you did have a recession, you did have some employment loss, that could be a logical reason why managed care revenue might be done. But otherwise, that seems like a pretty conservative assumption, I mean.

Yes. I mean, again, I think we have a reasonably good outlook on mix. We saw great enrollment numbers in the health insurance exchanges. And generally, it correlates well with good commercial volume and mix for us. So that's very positive. We -- in our markets are still a full employment, low unemployment basis. And so we don't anticipate and we don't really see anything out there that suggests mix should dramatically change on us. Now we were benefited during COVID because our Medicare population was a population maybe stayed away from the health care setting. Medicare may return, may adjust mix. We don't get as concerned on mix, the percentage of, as long as both segments are growing. Those are very positive trends for us. So there may be a scenario where Medicare grows a little faster than commercial, we still see growth in the commercial segment that should deliver, I think, a reasonable output for us.

And how are you thinking about Medicaid redeterminations, ACA enrollment growth. So obviously, somebody comes off Medicaid and goes uninsured, that's a bad guy for you. If they go to the HCA, that's a good guy. If they go to employer sponsor cover, just even better good guy. I guess, that's how you would characterize it. So obviously, it depends on where you think the people are going. When they come out, I mean, Texas ACA enrollment was up 40% last year, 30% this year. Florida was up 20% last -- or 30% last year, and another 20% this year. So do you have sort of explicit -- well, I guess, not because your commercial mix is relatively flat. So it doesn't look -- that seems like another place where maybe there's some development that could benefit you that...

I think so we have not factored any material assumptions due to Medicaid redetermination of '23, there were too many moving parts. We're just now beginning to get insight into states' plans about how they will go through their redetermination. They filed some claimings on that. Obviously, beginning in April, different states are taking a little different avenue. We've got a lot of resources accumulated to try to respond to that and make an outreach because we're looking a lot at studies that suggest many of the people that may lose coverage and redetermination are eligible for employer-sponsored insurance, to your point, or eligible for subsidies in the health insurance exchanges. So our focus is to try to make outreach efforts to those individuals, assist them in evaluating what their coverage opportunities and a system to the extent we can in enrollment activity. And so we're going to wait to see how each state operates on there, but we do think there's some opportunity in there to help people gain coverage that they are eligible for and buffer the impact of any adverse event due to the Medicaid redetermination. And to your point, if some of those studies are correct and people do move into the exchanges, then it could be some positive trends for us.

Got you. My observation, HCA does kind of one -- has done one major new market acquisition, usually a multiple hospital system, kind of about once a decade roughly has kind of been the cadence, but I get a lot of questions about -- I mean we're all reading the headlines about the nonprofit losses, particularly in 2022. Maybe some of that's overstated because there's a lot of mark-to-market on investment [indiscernible]. But it's clearly the operating performance wasn't very good broadly as well. You've got this long-term 4% to 6% EBITDA growth algorithm, how do you think about acquisitions? Are you -- or is more stuff flying across your desk to look at? And if that was true and you were so inclined, is the regulatory environment in a place where it's reasonable to think that more could get done around?

Yes. I think of the acquisitions and 2. One are in-market acquisitions and then second to new market. Talk about in market first. So most of our M&A activity over the years has been building out our existing networks. There may be a handful of tuck-in hospital acquisitions, building out our urgent care or surgery center and whether we're investing through capital or investing through acquisition, building out that network. And we see -- still see a lot of activity in the in-market network, and we have the ability and capacity to do that. There are some markets we are restricted of doing a hospital acquisition, just given share and the activity of the regulatory oversight on it. But new markets, we don't believe that, that regulatory oversight is a prohibitor for us and so we'll have to see how that plays. We are willing to look moving into new strategic markets. We have the balance sheet to be able to do that. But we have this filter that we go through when we evaluate new markets, in terms of is the market attractive from our perspective, from a health care environment, demand setting, from a competitive landscape and the like. And our historical and general position is we want to move into a new market with market depth in density, being relevant in the market #1, #2 provider, have the opportunity to be -- and almost by definition, those are those large not-for-profit systems today. And over the past couple of years, everybody is dealing with COVID. We generally would have some conversations going on, but they take a little time to materialize and so it's hard to call when they'll show out. To your opening point, we've largely been organic. We haven't entered into a new market since Kansas City before we did Asheville, North Carolina and maybe you could call Savanna, Memorial Savannah new markets. So the growth for HCA over the 20 years pre-COVID was mostly growth through organic, which we're beginning to see some opportunities before COVID hit. Our history suggests that when you go through a market disruption like we had that those conversations may pick up, and we'll just have to see how that plays out.

Got you. Can you talk about the structure of your current joint venture with Envision, kind of why that was structured that way. Now you're buying that up to a majority stake? What will that do for you, allow you to do? And then also, I think there's a little bit of financial statement impact or just moving around a little bit, maybe not material, but just walk us through what you're doing.

Well, let's be -- so we have the hospital-based professional service environment. You generally think about emergency room, anesthesiologists, hospitalists, sometime pathologists and radiologists. And historically, we have a contract for those services and we still can't track for those services. Rick created a joint venture with Envision probably 10 years ago that it would allow us to participate in governance and participate in program development, clinical programs and the like. And it was like a 50-50 joint venture where we could utilize their management capabilities and really get some synergies between these programs and market consolidation. And it proved to be very productive for us for a period of time. And you're right, we are looking, is there an opportunity to look towards to move up in that equity and even be in a little bit more -- a higher governance control going forward, and we're evaluating that. It's not our only model. We have direct contracts with a lot of other providers, and we're beginning to evaluate even in-sourcing or employing some of those in some cases. So we have a multipronged approach to the hospital-based physician space. And we have an opportunity with a vision to buy up in a joint venture that allows us to, I think, to participate at a little higher rate in the governance and some of that program and development and help make sure that those programs grow and stabilize.

And is there -- I mean, I think your professional fees for outsourced physicians runs through the OpEx line. Does this change, does this buy up move anything geographically around the P&L or not.

In terms of net earnings, we're still evaluating. I don't see it being material yet. It will move from a nonconsolidating joint venture to a consolidating joint venture. So there are some moves, we'll talk about when we get a little closer to the execution of that day. There's likely we'll put on the revenue and expense associated with that consolidating program, where now we just have a nonconsolidated entity. So there is some effect to that. Net-net on the earnings line, we're not expecting it to be material at this stage. But we're continuing to process the diligence as we go forward in the next 60 to 90 days.

Another relationship you have this kind of interesting is the relationship with the Galen School of Nursing. Can you just talk -- you talked about an investment that does hit the P&L this year. What is that investment doing for Galen? And another thing, how many of their graduates end up coming to work for HCA? How material is that for you? And just talk about why you're making that investment?

Well, it's a great operation for us. And hopefully, people can see the strategic rationale for it. We're one of the largest employer nurses in the country. They're one of the largest educators of nurses in the country. So our goal is to have a Galen College of Nursing campus in every one of our major markets. We have about 14 campuses right now. I think we're on schedule to add about 7 more this year, probably another 7 or 8 in the following year. So they're on a growth trajectory as we're building the amount. I think they had 5 or 6 campuses when we acquired them in early '20. I believe we have about 12,000 students in Galen College of Nursing right now. And our goal is to continue to be able to hire a lot of those graduates into HCA on there and a lot of dynamics associated with that. But we think we can hire hopefully, the majority of the graduates coming out of Galen College of Nursing as we continue to integrate them into the HCA marketplace. But we're very pleased with that, and we are investing into that as we have start-up costs for these new campuses, but it's still productive for us. It still is a contributor to HCA and a really key strategic aspect of our response to the labor environment today.

Okay. Okay. We're out of time. Bill, thank you.

Thank you, Gary. Appreciate it. Thank you, everyone.