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

Good morning. Welcome to Oppenheimer's 33rd Annual Healthcare Conference. I'm Mike Wiederhorn, health care services analyst. It's my pleasure to have HCA Healthcare today. We have Chief Financial Officer, Bill Rutherford; and VP of Investor Relations, Frank Morgan. Welcome. Thank you guys for joining us.

Good morning, Mike. Hello, everyone. Good to be with you.

So some fireside today, there's also a chat box, feel free to place any questions in there as well. So I'll start off with kind of a big picture question here, 2 part. We've had a few months under the belt now in 2023. How should we view trends of the business? And do you think we can use this year as a normalized base to grow off of? That's the first part. The second part. How should we think about seasonality in 2023 guidance relative to last year. And then also relative to pre-pandemic as we think about some of the factors like the Texas Waiver Program and the timing of other government reimbursement.

Let's try to cover that. I can't speak to specifics to '23. But based on the observations we saw on the last half of '22. We believe we're seeing a return to normal volume and demand patterns. We were very pleased with kind of the volume trends we saw in the last half of 2022 for -- think in the fourth quarter, our emergency room traffic was up 11%. Non-COVID volume was up close to 5%. So it gave us a view point that we're seeing in the markets a beginning of return to normalization. And most of our markets are open and act on there. And that kind of informed -- a lot of our themes as we turn the calendar into 2023. And as we've said in other settings, we believe we're going to see a return to normal seasonal demand patterns. It's always hard to call exactly at what pace or [Indiscernible] volume returns. But we -- based on what we saw in the last half of the year, we have a pretty good belief there's a lot of market demand and a lot of activity in our markets. Our challenges to make sure we have the labor [Indiscernible] to serve that demand. But I think '23 to your point, is a return to normal demand patterns. I think mostly the COVID surges are behind us and the interruptions of demand patterns hopefully are behind us, and we'll see returning to normal trends. And that's what we're anticipating. We'll have to obviously see how it plays out during the course of the year but that's what we're anticipating right now. And again, pleased with what we saw in the last half of '22.

When you look at your various top line buckets relative to pre-pandemic levels, do you think -- when you're talking about relative to where we think it's going to be 2023 as a representative future trends. Do you think any parts of the business have changed permanently? And then how much of an impact are you seeing from capacity constraints as well impacting this?

Yes. I tell you, we've gotten this question before any structural changes, COVID. I'm not so sure we see it in any material way. I mean the only one I would call out is during COVID, we obviously saw a shift of orthopedic joint replacement shift from an inpatient procedure, mostly to an outpatient procedure. That's mostly behind us. If you view that as a structural change or not [Indiscernible] reasonable good orthopedic volume, but there's a little bit of shift of site between in and out during COVID. I can't say that as a team, we see any other major structural changes at this point. We have a long track record pre-COVID, have seen underlying organic demand in our markets, we think, again, that's going to return. We see, I think, reasonably good payer mix that can maintain as well as acuity levels if we can maintain those trends. We are fortunately -- we saw good numbers in the enrollment, and health insurance changes, that generally portends positive things for us. So right now, I don't see any structural changes. The labor market obviously was disrupted during cover that we, and I think everyone else are having to respond to that. I don't know if I view the "structural changes" but there's changes in the labor market. We're having a [Indiscernible] labor resolve in the first half, and we spent the second half being able to see improvement in those trends. We had May and didn't make adjustments to our base employee wages to be responsive to the market. And we started in the last half of '22. We begin to see turnover decline, recruitment up, and that's really a key indicator for us in terms of the net hires that we have in order to reduce the utilization of contract labor. So we see it improving sequentially. Again, [Indiscernible] back to pre-COVID and we're not out of the woods yet. But we believe we'll continue to see sequential or incremental improvement. We turned the calendar thinking there was a little more room in contract labor. Again, pleased with our contract labor as a percentage of SWB was I don't know, roughly 9% in the first half of the year down to close to 7% in the second half of the year. We think there's a little more room in that, mainly through utilization as we can continue to see good recruitment trends, reduced turnover, and that will allow us to see improved trends as we go through '23.

And wage inflation, where do you kind of see that settling out going forward in your thoughts?

Well, if you just look at pure wages, I think it's somewhere in that 3.5% to 4% range, potentially 3% to 4% is what I would call it, where maybe historically it was 2% to 3%. So we have made wage adjustments in third quarter of last year to be responsive to that. And I think that has -- will carry us into kind of our next cycle that generally should be similar. Again, that's factored into our overall guidance. We can -- a lot of variables go into that as we've talked about -- our overall -- if we can keep our overall labor cost growth in line with revenue and keep our SWB as a percent of revenue, generally flat. I think that's a good outcome in this environment. And again, a lot of puts and takes that go into that. Fortunately, we've had to pay for as we've reduced contract labor in the high premium labor, then we can reinvest that reduction back into our employee wages. And I think the net-net is a good thing. We've been able to do that and still manage our overall labor cost in line with revenue. And so again, a lot of focus for us. You may have heard us talk about kind of the 4 corner effort, invest in recruitment, proven retention, talked a lot about capacity management, we can manage capacity and length of stay as well as our care model, we supplement the care team with patient care attacks, patient safety attendance, maybe even paramedics in the [Indiscernible], all that can be part of the overall solution. And again, I think we see the labor market sequentially improving, and hopefully, that will show itself during the course of the year.

Continuing on labor. Can you discuss the strategy with the Galen School of Nursing and whether there are more opportunities to open facilities? And then the second part, are there other new approaches that you can consider to further improve the labor situation?

Yes. I mean there's a lot of efforts in there. I think Galen is a really important part of our response. We're extremely pleased with the acquisition of Galen's College of Nursing. I think we added 6 to 7 campuses in '22. We will add, I think, another 7 campuses in '23, probably a similar amount in '24. I think the enrollment in Galen College of Nursing was up to 12,000 students, and that's grown tremendously since we acquired it. Our goal, honestly, is to have a Galen College of Nursing in every major market, potentially in [Indiscernible] markets too. You can hopefully see the strategic fit of that. We're one of the largest employer of nurses in the country. They're quickly becoming one of the largest educator of nurses. So I think it's just naturally to see the strategic alignment between the 2. And so we're very pleased with that. It's an important part of our recruitment channel and the labor market. It doesn't solve all of it. So we have relationships with other nursing schools in other markets. Those are some -- been in place for some time. So we continue to make sure that we develop relationships with all that. So it's one part of our solution, recruitment, making it easier for people to apply, putting a lot of digital solutions in place, improving our onboarding process so that once we recruit you, we could kind of have a kind of -- we call it a career of a lifetime, you want to practice in a physician clinic, you want to practice in a surgery center, you want to be in a hospital, you want to be in another setting that can really meet you to where you want to be on that. And that has really, I think, benefited from. So we have a host of strategies to make sure that we can recruit as many clinical workers that we need. And again, we're making improvement. We're not where we want to be. But again, we expect continued improvement through the course of 2023.

Move away from labor. What other -- continuing on the cost side, what other impacts are you seeing from inflation on your nonlabor cost lines such as supply cost?

Yes. I'm very pleased with our supply constraints. Our teams have done a really nice job. I think our supply cost per unit was up around 1% in '22. And given the backdrop, that's great. During COVID, we extended many of our supply contract terms as we're just -- everyone was dealing with sourcing. It does open up a little bit as those contracts open up some inflationary pressures [Indiscernible] but similar to their own wage pressures, some revenue pressures and they're asking us is that host hospital to recognize increased subsidies. We're having to respond to that, but we said we expect those cost trends to really outpace our revenue. We could believe we can manage it within the context of HCA's cost structure that [Indiscernible] by our case mix index. If we can maintain our current levels, based on the gains we saw. I think that's a pretty good outcome on there. There are a lot of things that are driving our revenue per unit or payer mix or acuity. Obviously, pricing is a factor in that. So our overall guidance is revenue per equivalent [Indiscernible] around 2% to 3%. So all of those factors come into play. The acuity is one of the harder ones to predict. So we have to go on our historical trends. And our historical trends, at least the last half of '22, we're maintaining our acuity levels. To your question, we do do a lot, and we have for some time to invest in developing our network to be able to provide a higher acuity level of services in our key service lines, whether it be cardiology, trauma, women's and children services. So a lot of our investments and growth strategies are to continue to build out higher acuity services. So that's part of the equation as well.

Okay. We continue on top line. How are REITs trending in you think about managed care contracting, how are rates trending in negotiations? Are you including inflation escalators for protection kind of give us an update on what's going on there?

Not as much as sure escalators. But as we've talked about on our call, there is a recognition by the payers that we're in a higher inflationary environment than we have been. In June, we're pleased with the fact that we are able to secure some more recent contracts with those inflationary trends considered. It will take a while to see it in our overall revenue portfolio because, as you know, we were generally contracted 2 to 3 years out. So it will take a little time for it to lead into the overall book. But the contracts that we've seen recently, we're pleased with the payers' recognition of the inflationary environment, and we are able to secure a little higher rates than trend. It doesn't fully cover the inflationary pressures that we're dealing with, especially with inflationary numbers we saw this morning, but there is recognition in being able to be above trend. And hopefully, that will continue. And again, we're generally pleased with the progress in that area.

Maybe continuing on contracts. Are contracts varying in structure? Are you seeing more value-based contracts, I believe that's a hot topic in health care continuum.

I can't say that we've seen a material change in contract structure. I mean, we've always had some aspect of value-based care, whether they would be some pay...

Let's move over to the reimbursement environment from a state level. Can you maybe talk about your guidance assumptions, specifically around state-based labor programs like in Florida and Texas?

Mostly in those programs, we project to be flattish. A lot of -- Florida, we have the DPP program. So -- the year-over-year changes in Florida in our guidance were flattish. And I think the same is for Texas. We are always subject from time to time with pluses or minuses in those programs based on either timing differences over the line. But embedded in our guidance was mostly flat in terms of the supplemental payments. One of the big topics of discussions around states is around the Medicaid redetermination process. We did not -- yes, we did not factor any material impact of Medicaid redeterminations in our guide. So too many variables at the time, still unknown. We're beginning to see some of the state's plans on there. We're beginning to read some of the outside studies of what the potential impact could be, but our guidance doesn't anticipate any impact. If I believe the studies, there's a potential impact of some positive transports if a number of people who may find themselves disenrolled from the Medicaid program are eligible to employer-sponsored coverage or eligible for subsidies of the health insurance changes, we could see some positive trends as they move from a medicated enrolling into either a commercial or exchange enrolling. We don't exactly know how that will play out. States are beginning to file their plans. We're beginning to get some insight to that. Our effort is to really focus on outreach to that population as we see it. And to be able to assist them in evaluating what coverage is available to them. And if indeed, the people who get disenrolled for Medicaid can find coverage in either the exchanges in our employer-sponsored health care, I think that could be some positive trend. But right now, we haven't made any factor into that. I think it will likely be a second half of '23 impact as some of those states will have to give notices as I understand, Florida is planning on going through their eligibility screens based on the month of your enrollment. So it likely will [Indiscernible] happen over the course of the year. I understand Texas is maybe looking at individuals in certain cohorts. So again, we're just beginning to get some insights to that. Our efforts and I think the industry's efforts are really assist those people and evaluating that to get access to good health care coverage.

Is there anything else from a PAT perspective that we should be thinking about from an impact from the end of the public health emergency, is there anything else that you guys have taken into account?

I don't think anything material, Mike. We've talked about the DRG add-ons will go away. We talked to factor that in. There are potential handful of things that are not material. There were some waivers in certain like at emissions to rehab facilities, as I understand it. I don't think it's anything material to us on there. But there are a handful of other things that occurred that I'm not so sure we have any material financial impact, but there are some things that also go away when the personnel -- when we call the customer to see.

Last thing on the rates. With the Medicare rates are coming up, the rate season is coming up, is there -- what are your thoughts on upcoming inpatient rate updates? And are there any other policies that the industry is focused on at this point in time?

No. I mean we're hopeful when we do see next year's rates that will factor in the inflationary environment. I don't think this year's rates did. They will lag a little while based on wage rates. So Again, I'm just hopeful. I have no knowledge of what that could be. But generally, our Medicare rates stay in a pretty tight [Indiscernible]. I'm not anticipating a material move on there at this stage, but we'll just wait to see when those rules get proposed. The only thing that's out there is around 340B regulation. We have inside and we factored in some prospective impacts. As I understand, it's still unclear how retrospective impact of 340B will be handled. So I really don't have any information on that. But that's the only unknown potentially. Everything else from what I understand, at least that we have visibility into the course of this calendar year, we factored into our overall guidance. And then we'll see when rules start getting published hopefully around summer time.

Yes. That's a light of time here. Let's move over to the capital balance sheet. Can you -- your updated thoughts around capital deployment priorities and how those are affected by the higher interest rate environment?

Yes. I mean, fortunately, we've got plenty of capital to deploy. It's really a part of -- and we think we have a disciplined and balanced allocation of capital. To your point on interest rates report we -- about 12% of our debt is floating rate. So we have some exposure to rising interest rate, but it's limited on there. Our capital priorities remain is our internal capital investment to invest in our markets to meet what we see as the growing demand for health care. So that's really -- our first priority is to make sure we have ample capital to meet growth opportunities in the market. We anticipate our capital investment this year. It will be about what it was last year around $4.3 billion to be on some number or any side of that. And we'll try to be opportunistic as we see opportunities. We may adjust that if necessary. Secondarily, the balance sheet in terms of a leverage position is at the low end of our stated range. Our range is to operate the company between 3 and 4x leverage. We closed the calendar at the low end of that. So we think the balance sheet is in a really good position. We pay a relatively small dividend and then we deploy kind of the remaining of our free cash flow into a share repurchase program. We had an enhanced program in '21 and '22. We got another authorization in January. We have had roughly $4.5 billion when we turned the year. We anticipate developing a majority of our remaining free cash flow into a share repurchase program. But again, I think our overall position around capital allocation first is to invest for growth. be positioned on the balance sheet to be opportunistic if acquisition showed itself and then do an appropriate level of return to shareholders. And I think over time, that's proven to be part of the long-term value creation for HCA Healthcare.

So when we think about M&A, what's the pipeline look like -- what are you most focused on at this point in time?

Yes. Well, we're -- when I think about M&A, I think about it in 2 calls, our in-market acquisitions to build out our networks. And in any given year, we have a reasonable amount of activity in the M&A. It maybe around building out our urgent care platform, who may be some select surgery center acquisitions, maybe some other, maybe even tuck-in individual hospital acquisitions. So that's part of our activity, and we have activity in our M&A to build out our network. There are some markets because of the current FTC reviews. We can't do as many hospital acquisitions this year. So -- but we have a fair amount of outpatient network development in the end market activity, and we continue to look for those opportunities. New market acquisitions, those come across sparingly over time. We're prepared to do that if a new market and strategic acquisition presented themselves. I think for the past couple of years, those have largely -- everybody has been dealing with COVID. We'll see in a post-COVID environment where more opportunities present themselves. They generally -- when we think about the markets we want to operate in and our approach to those markets with taking a pretty reasonable share, those are generally would be larger not-for-profit system and it's sometimes difficult to those systems to make decisions to sell us. But we'll be prepared to move if some of those present themselves. So I think in the intervening time, most of our acquisitions will be in-market network development.

We have time for like one more question here. So just more of a big stroke question. As we look towards 2024, what makes you most excited about HCA?

Well, I think there's a lot to be excited about HCA. When we think about the experiences we've been through, over the past 3 years in COVID. Many respects we're coming out of coat environment stronger than we went into it, organizationally, competitively, I think from our clinical investments and I think from our balance sheet perspective. So I think we're well positioned in our marketplaces to be responsive to that. We see growing demand for health care in our markets. We believe we operate in what we view as the most attractive markets, and we have the operating model to build out our networks to support them with scale -- some of the most exciting things we have going on in HCA utilizing our scale to support the delivery of care, whether that be in technology where we can bring technology to assist our caregivers whether that being in some of our big machine learning, we can do more predictive analytics, we can help our clinicians operate in Florida. We can schedule, caregiver is better. So we have a lot of technology investments. Our Galen College of Nursing is a really exciting development for us. So there are many things, I think to be excited about for HCA. And our view is to continue to deliver long-term value to all of our stakeholders across the enterprise.

Well, we're out of time. Thank you today for your participation, and I appreciate your time and all the [Indiscernible] on the company and look forward to talking [indiscernible]. Thanks again.

Thank you, Mike. Appreciate it.

Thank you, Mike.