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

It's my pleasure to be introducing HCA Healthcare. HCA is the largest hospital company in the country. Presenting today, we have Sam Hazen, who is the CEO; as well as Bill Rutherford, CFO. Frank Morgan from Investor Relations is in the room as well. So I guess I don't know, Sam, is there anything you want to start off before we go into Q&A?

Yes. I just want to put a little context into the company at this particular point in time. So I told the group earlier this morning. We came out of 2019 with an enormous amount of momentum as an organization, obviously, pandemic hits. But we just had a CEO conference in Miami. In our CEO conference, we were talking about the successes that we had. And actually, we think we have more momentum coming out of the pandemic than we had going into the pandemic. And a lot of that momentum is centered on the culture of the company and where the company sits reputationally within the communities that we serve. We think our competitive position has actually improved as a result of what we were able to do inside of those 3 years. And it's evidenced by the fact that our market share is actually up over where it was in 2019 by 60 or 70 basis points, with fairly broad-based success across our portfolio of markets. So competitively, we think we've actually improved our systems capability as evidenced by market share as well as some other factors that we think are important to our long-term success. And then financially, we have improved our balance sheet quite significantly during this time period and put the company in a really good position to invest or have optionality around whatever we want to do with our capital allocation. So on 3 major dimensions, the company has actually come out of the pandemic with strength and move from strength to strength, I think, as an organization. So as we go forward, we have an agenda within our company to really reposition us over the next cycle, let's just say, the 5 to 7 years, and how do we put the company on the same kind of success that we had in the previous period where we took our market share literally from 23% in 2011 to 28% today as a company. So how do we do that? We believe have opportunities on 2 fronts. The one front is the markets that we operate in, have this embedded demand growth. There are incredible markets with respect to population growth and other factors that we think are going to naturally lift demand for healthcare services. You said we're a hospital company, Kevin. We're way beyond that. We have about 2,500 outpatient facilities that are part of a system approach to hospitals. And we think that's a unique model that is durable and can go the distance as it's done in the past. So we have a lot of growth inside of our markets. Florida is growing. Nevada is growing. Texas is growing. Tennessee is growing. Utah is growing. These are really -- South Carolina is growing. Really important markets to our long-term success, and there's this natural lift that's occurring. The second opportunity that we think is really to get better at what we do. We're pretty good right now. But we see across our portfolio of facilities, opportunities to narrow the variation that exists on some key elements of our business and actually improve the quality, improve the efficiency and really even improve the growth in some cases because of some of the variation that exists. So we're focused with our technology agenda. We're focused with something we're calling our care transformation agenda and workforce development, and in the ongoing financial resiliency agenda. And so those 4 elements, we think, are going to help us on the other opportunity that we have as an organization. So we're pretty excited about where our company is with respect to overall positioning on sort of the organic growth prospects as well as the improvement in the organizational outcomes.

That's great. That touched on a number of things. So just to kind of dig into that. The market share number that you talked about, like how do you take it from 28% to the next step? Like what's the biggest opportunity? What hasn't been invested in yet? Where are the opportunities?

That's the question I'm asking, the CEO of HCA is having. So yes, we're asking ourselves a question. We grew 500 basis points in the last decade. What does it take to grow 500 basis points in the next decade? Clearly, it's going to be capital. We're going to have to invest capital to expand the capacity of our network, expand the reach of our networks, deeper into the markets and we're prepared to do that. And as we just mentioned, we have the flexibility to do that. The second thing for us is continuing to advance our services. We've been very aggressive over the past 7 to 10 years in adding service line capability, both horizontally and sort of vertically within a particular service line. And so we still see opportunities there. I think our outpatient footprint will grow even more. So we'll have more channels, if you will, into our hospitals. So those are the areas that will help us hopefully achieve market share. I mean we're an execution-oriented company. That's what HCA is all about. It's in our culture. Details matter. Relationships matter. And we'll continue to leverage those attributes to help us push forward on market share gains and hopefully, achieve what we achieved in the past with our future efforts.

Okay. I guess one of the things I'm trying to get an answer to this week is the volume growth that hospital companies seem to show in Q1, med tech company, managed care says it's not a problem, but you guys showed really strong growth across the board. And it kind of felt like it came together in Q1? Is there a reason why? Is it easy comps? Or is there something that flipped recently to kind of drive that?

I don't think it's flipped. I think we saw building momentum of volume throughout the last half of '22. I mean COVID is in the rear view mirror, hopefully, in terms of surges. So we just saw building momentum in late '22. I mean if you look at fourth quarter '22, I think our emergency room visits were roughly 11%. That carried through in the first quarter, we were up 10% in the first quarter. So I'm not so sure there was a flip. I think it's just building momentum. We see the markets are wide up, good population growth, still strong economic indicators, good enrollment in the health insurance exchanges. And I think all of those factors are playing into, I think, positive volume that we're seeing right now.

So we always are trying to figure out volume versus where it was pre-COVID like where do you think we are in that? Are we back at baseline? Is there still an opportunity? How do you think about?

Well, it depends on how you look at it. We've said really throughout '22, we see a return to historical volume patterns and cycles. And I think that's what we saw and even in excess of that. For HCA, that's historically, we've grown pre-COVID 2% to 3% a year in volume. Some years, it was above that, some years on the low end to that. And we think that's a good planning horizon. Fortunately, we've exceeded that over the past couple of quarters and we'll see where that goes as we go through the balance of the year. But when we look at where we are today, baseline into even 2019, I think we're very pleased where the company is. Revenue growth, if you look at that, it's almost 25%, 28% from that period of time. Volumes up, our outpatient surgical volumes are trend. So again, I think we've weather through that pandemic disruption. And as Sam mentioned, we see a lot of momentum and I think probably even in a stronger position in many cases.

Because I guess, like to your point, your volumes are above 2019. You've been above 2019 for a little while longer than your peers have. But if you take that 2 to 3 and kind of say like, well, actually, you should be 8% to 12% above that, quite there?

I'm not sure I will buy that just because there's such a disruption early '20. I mean, especially that early period, when you look at March and April, I mean volume really fell. So I don't know if necessarily we think you can just CAGR that out and say that's where you should be. I think if you -- except for the volume in 2020, you look at '21, good volume growth, '22 good volume growth. I think we're on a good trend for '23. So there were some unique things in 2020 would be hard to recover entirely from that.

Okay. So as far as 2023 goes, it doesn't sound like you're seeing anything unusual, no bolus of utilization or anything that normalizes. This is -- you kind of think this is a decent way to think about 2023?

I think so. I mean, that's what our guidance suggests. I mean obviously, we'll need time as it goes through. But we're pleased with the momentum that we're seeing. And hopefully, that will continue. And we're prepared to, I think, continue to manage through that and execute on it.

I'm not looking back to 2019, just for the record. We're going forward. That's in the rearview mirror, we're going to look through the front windshield. We think there's sufficient demand in the market and growing demand in the market to accomplish what we need to accomplish.

And then your commentary about doing things better and more efficiently, like there was -- a lot of that was around volumes and things like that, but we think about the margin side of the equation. You guys have been remarkably consistent between 19%, 20% margins for like 20 years. It's kind of crazy. Like is that just the way to think about it, like going forward? Or is there opportunity on that side of it?

We're always looking to drive appropriate margins up. And there's a lot of variables that go into margin or volume because we get incremental margin, pricing, acuity, clearly managing our cost structure, Sam alluded to. We've got efforts to continue to drive efficiencies throughout HCA on a multiple resiliency programs, whether it be through benchmarking ourselves, next generation of shared services, some of our capacity management. So we're constantly looking for where is the next opportunity of efficiency and again, we're doing that in a backdrop of a higher inflationary environment that we've seen in 20 years. And so we're very pleased where the margin profile of HCA is. If you look at our guidance, it would suggest that we can continue to operate in that level, and we'll continue to do everything to do that.

Yes. So I guess, in particular, more recently, the cost spike that everyone's feeling is labor. How are you managing that? What should we be expecting as far as temp labor, where is that going and wage growth, where is that going?

Well, we hit the high watermark in first quarter '22 because of just the labor disruption that COVID caused. And we've been really pleased with the progress in the labor since that first quarter of '22. And I think that shows out in the data. If you look at first quarter, about 9.5% of our SWB was dedicated to contract labor. This most recent quarter, it was just over 7%. We think there's continued opportunity to improve utilization. Our teams have been focused on increasing recruitment, reducing turnover. We mentioned some of those statistics on our call. So we continue to see opportunities. We're taking some of the benefit of the reduction of contract labor, and we are reinvesting back into our employed workforce, and that's showing, I think, some positive developments. So we'll continue, I think, to manage that appropriately. And if you go back to our year-end call, our guidance suggests that we can maintain our labor cost as a percent of revenue, very consistent with where we ended 2022.

Let me go back to efficiency thing and the margins up. We believe that if we can fully digitize HCA in sort of an industry-leading way, mirror what's accomplished -- have been accomplished in other companies that we have opportunities to get significantly more efficient than we are today, Kevin, that assumes all things being equal. The other thing I will tell you that our care transformation and innovation agenda, which is connected to our digital agenda is also an opportunity for us to get a little bit more consistent in the care models that we have and the processes underneath those models and again, deliver a more efficient and a better outcome for the patient as well. So those 2 things have a lot of upside for us, we believe. We've got to get through the journey of getting those things installed and ultimately implemented. But we think it really opens up the opportunities for the company on that particular dimension.

And where do you see that most? Is that savings on labor? Is it savings on supplies and savings on overhead?

I think it's across the board. I mean I think it allows us to utilize our people more effectively and more efficiently, I think it allows us to gain better consistency in utilization of supplies and what have you, our case management agenda and the throughput within capacity management, we think can be enhanced by this. So there's a lot of dimensions, if you will, to it, that will help us deliver efficiency, we believe.

And when you think about the labor market broadly, I guess, what are the things that -- when we look at it, clearly, there's been improvement like everyone is kind of saying Q1 peaked and has gotten better. But then when we try to step back and put it into context, we're still at numbers that like companies haven't seen in a number of years, like as far as labor shortages and vacancies and temp staffing. Like is there a thought process on how we should be thinking about over the next 2 or 3 years? Is there a slow improvement? Is it tough to improve from here? Is it a dramatic improvement still to come? How do you think about it?

I think there's continued improvement, and we continue to see the labor market settling on there. And I think, again, we're very proud with the effort the team has made in HCA. We -- our recruiting is up, our turnover is down. Contract labor is not quite to pre-COVID levels, but it's on a pathway to get there. So I think we're pleased with the progress we're making, and we'll continue those efforts as we go through the year.

And I guess at the beginning, Sam, you mentioned one of the things that you felt like from a momentum perspective as the balance sheet was in a better spot. I never really think of HCA having a typical balance sheet to deal with. But like when you think about the flexibility you think you have now, where does that capital go? What's the most interesting thing to be investing that capital on?

Well, just for reference. So we -- our reference on that is our leverage ratio. We've said our stated range to operate to come in between 3 and 4x leverage, and we've consistently been on the low end of that. A really key strength of HCA, in my opinion, is kind of our balanced approach to capital deployment. Our first priority is invest in our existing markets. you saw after our first quarter call, we raised our capital expectations for '23, and that's a signal and a sign of the opportunity we see for continued growth in the marketplace, whether it be through campus expansion, outpatient network development, service line deepening. And so we've got ample capacity through our cash flow from operations, will hover between $8.5 billion and $9 billion. And so we -- first priority is investing capital. Second priority, I would say, is to the extent there are opportunistic acquisitions present themselves, we have the ability to execute on that, and we do. Mostly, that's around network expansion and network development. And then lastly, we look at what's the appropriate return to shareholders, whether it be through our dividend program. We've been a very active purchaser of our own stock over the past couple of years. So I think that balanced allocation of capital will continue. And as -- you'll hear us talk about, as we look forward, where there are further investment opportunities with our resources to continue the growth agenda. And again, that's what we're going to continue to go through in '23, and we continue to see great returns on those projects. So we'll continue...

Let me just add a couple of points there. I mean, obviously, our technology agenda, we're going to need to invest in there, Kevin, and we're prepared to do that, and we're doing that as we speak. So that will be an area that gets a little bit more attention than maybe it did in the past. I think it's important to understand the company actually ran 74% occupancy in the first quarter, which was above 2019. And so I think from that standpoint, there's this belief that inpatient demand is going away. It's actually growing and the type of demand that we're seeing more acute patients is actually a great thing for us because we have the same fixed cost regardless of the patient in the bed. And if it happens to be a patient that's got more acute needs that generally generates more revenue for us. So the contribution margin downstream is quite productive. When we invest back in our existing facilities, again, we're investing on top of a fixed cost platform that allows us to create greater returns on investing on those facilities, especially ones that are constrained. And so that's got a bit of a conservative capital allocation, but it's part of the formula for success on how we deliver what we believe to be really good returns on invested capital. And so that model will continue. Outpatient investment is easy. It's not that expensive. And so we have a robust investment pipeline of new projects and acquisitions where we can. But that's low dollars. When we put the big dollars on top of the hospital platform and then leverage that fixed cost, it's really a nice return opportunity for us.