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

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So we base our go-forward assumptions on. You get a little forward visibility, you can look in physician clinic office, you can look at surgical schedules. But our real volume kind of assessment comes from just predictive patterns we've seen in our markets. And we've said, really, as we went through '22, we see a return to normal and historical volume patterns coming off at least a post-COVID surge environment. And we started to see building momentum in the marketplace, good volume, good demand last half of '22. As we turn the calendar into '23, that momentum continued. And we were very pleased with the volume trends we saw in the first quarter. Obviously, first quarter, we still had a comp from COVID activity in the first quarter of '22. And so as we go through the balance of '23, we continue to believe this return to normal trends makes sense for us. But we're very pleased with the volume patterns and the demand we're seeing in the markets right now.

So we usually think about that translating that normal -- that return to normal trends translating to flattish EBITDA sequentially into the second quarter, a softer 3Q and then 4Q being the strongest quarter. Is there anything to call out from the first quarter results that would change your assessment of that seasonal pattern?

No, I wouldn't say. I mean that's our baseline assumption. There's always things that come period to period that's hard to predict. But I think, historically, I think that makes sense in terms of the trends. Again, first quarter was a pretty good quarter for us, I believe. We did have some COVID support payments in the last half -- in the first half of '22 that don't continue into '23. But outside of those that we've called out, I think it's fair to assume a normal seasonal trend for us.

Can we dig in a little bit deeper on the underlying demand in your markets? Do you believe people were delaying the lower acuity treatment? And do you believe the 4% to 6% surgical volume growth in 1Q reflected some recapture of delayed electives?

There may have been. It's hard for us to dissect -- the volume that you're seeing in any one period, how much came from people who maybe deferred care or not. Fundamentally, I do believe people deferred some low acuity care during COVID. I don't know how much of that's still left. We've been probably 14 months since we had a COVID surge. So I would think many of that -- much of that has returned, but there still may be some residual of that. I think the dynamics we're seeing in our markets, we saw strong population growth during COVID, people moved to Florida and Texas and the like. Markets are still wide open. We still believe we see very favorable economic indicators. Still low unemployment, which tends to have a strong correlation to demand. So I think there's a lot of factors that go into our volume pattern. We think we're positioned better coming out of COVID than we were going into COVID. Our capital programs continue to be an important part of it. So it's hard to dissect exactly how much of that. But I think there were definitely some lower acuity services that were deferred during COVID. I think much of that's returned. Hopefully, there's a little bit more to return in the future.

And just getting to the deferral point. Over the last few years, there's been ongoing shift in high acuity procedures out of the inpatient and into outpatient, notably MSK. Has this created a top line headwind? And could you discuss your ASC footprint, competitive positioning, what other inpatient procedures you expect to migrate?

Yes. I mean, no question, during COVID, one of the service lines that moved rapidly between inpatient and outpatient was joint replacements. And it was largely, I think, driven by clinical protocols and anesthesia and pain management protocols. I'd say pre-COVID, 75% were done in an inpatient; post-COVID, 75% are done in an outpatient. Fortunately, many of -- much of those outpatients are still done within a hospital campus and still some going into ASCs. But we've navigated through that. I think that trend is mostly behind us. We don't necessarily see another service line that has those same characteristics to move as quick. But there's always been this migration to -- inpatient to outpatient. But we have a very large outpatient network. As you know, we have over 2,500 sites of care. We have an ambulatory surgery footprint, reaching 150 surgery centers and GI centers, as well as our hospital-based outpatient centers. So we're prepared, I think, very well to capture that migration when it occurs, and indeed we did.

And you noted strong payer mix trends in your markets as people can migrate to Florida and Texas. And one of your peers highlighted headwinds from sequential Medicare Advantage mix. And can you discuss your take on the MA mix trends and how HCA is positioned for penetration?

Well, there's no doubt we've seen MA, as a percentage of Medicare, grow over the years. I mean it used to be 1/3 of the Medicare business. It's pushing, in some markets, over half of the Medicare business, even north of that. And I think we're positioned very well, with both from a contract standpoint, obviously, as well as a network standpoint. I think our Medicare admissions in the first quarter grew over 5%. So I think pretty equal between fee-for-service and MA in that standpoint. So again, I think there's some marginal contribution that comes without Medicare. But we're fortunate we're seeing all categories grow. Medicare is growing, which is not a bad thing. And then our commercial activity continues to grow. And that's really led by health insurance exchanges. We saw great enrollment in our markets in health insurance exchanges. I think our HICS admissions were up over 19% or so in the first quarter. So we're seeing, I think, good growth in all of our major payer classes.

Okay. And just getting back to the HICS point. Of course, some of your large states, Florida, Texas, Tennessee, have not expanded Medicaid, leaving a coverage gap in those states. Biden's enhanced ACA subsidies are helping to fill that gap to some extent, though uninsured remain in those markets. However, with the expanded subsidies and the higher commercial reimbursement, have we reached or are we reaching a point where there are -- the economic benefit from the expanded individual coverage is offsetting the coverage hole left by holdout states?

I think it's -- I don't know if it's completely offset, to be honest with you. We still have uninsured activity in our markets, but it's been relatively stable. We were very pleased with the enrollment we saw this year. I mean we were seeing -- I think Texas is up 30%. And Florida and Texas combined were up close to 20% enrollment on there. And so that generally correlates pretty well with our volume that we see. And so we're very pleased with those enhanced subsidies that I think continue into 2025. I think it is providing coverage to a lot of people who otherwise wouldn't gain access to coverage. And hopefully, that will continue.

In addition to the embedded demand in your markets, you recently called out opportunities to improve quality, efficiency and growth by narrowing variation across the platform and key elements of your business. Can you expand on that a bit and give us an idea of the specific actions you can take?

Yes. Well, let me introduce Mike Marks, he's our Senior Vice President of Financial Operations. You may know we reorganized in the 1st of this year, we went from 2 operating groups to 3 operating groups. I think more importantly, we've elevated our most senior operators, Jon Foster is our Chief Operating Officer, partners with Mike, financial, to be able to drive consistent practices, reduce variation. We've talked about before our resiliency efforts is a really important part of our response to the environment, inflationary environment, and Mike leads those efforts. And one of these efforts we've had is -- we call it our benchmarking, but it -- and basically utilizing advanced analytics to look to see where do we have opportunities even inside HCA, whether to reduce variation and supply utilization and certain operating costs and the like. So Mike, do you want to mention a couple of the resiliency programs we have in place?

Sure. Yes, the one that you mentioned, I think, has been really powerful. So we've created an internal benchmarking tool that takes 166 measures of cost and operating efficiency. Every hospital will know exactly how they perform against the rest of HCA, and those are tied to external benchmarks as well. It helps our hospitals really find where their variability is. And over time, when you can find where you have the most opportunity, it helps our management teams really focus their efforts where their biggest opportunities are, instead of chasing every opportunity like they're equal. And from a corporate standpoint, it allows us to really find those areas of opportunity and provide corporate support down to the hospitals. So both internal and external benchmarking is very effective to help us really find the biggest opportunities and take -- and allocate our resources accordingly.

So we break down supply utilization by service line and compare across 180 hospitals, say, pharmacy cost per surgical case or medical device cost and the like. And you can see highs and lows, and try to explain are the reasons for those variations or do we have opportunities in some of those areas. Some of our other operating costs, whether it be repairs and maintenance, or whether it be some of our energy procurement, or even our physician support cost, you can look at anesthesia cost per surgical case. And we can use that even though we operate, we believe, best in the industry, there's still opportunity inside the economy of HCA. So this benchmarking tool and effort has been a key part of our resiliency program.

And is that something that you can really leverage when you're negotiating with payers in terms of being able to demonstrate efficient utilization?

I think so. I mean, obviously, we think we have a lot of value propositions to bring to the payers. Clearly, our network, our clinical outcomes, the ability to provide a full array of service to their members. I'm not so sure they're as interested in some of our efficiency plays, but they're -- our intent is to elevate our discussions with the payers on a much more strategic level versus a transactional level, where we can develop centers of excellence over certain clinical programs, we can provide full access to the coverage. So there's multiple ways we try to present ourselves to the payers, and I think we do a pretty good job at that.

And then you've talked about, I think, over the last year or 2, kind of contract rates with commercial payers kind of in the 6% range. Are we still seeing...

We haven't quoted that number, I don't think. We say mid-single digits. And when we started to see inflationary trends in late '22, we obviously started to introduce those inflationary trends into our rate negotiations. And we've been, I think, pleased with the response we've got from the payers. We've been generally successful of being able to close contracts in that range, which is a little above trend, and recognition in the inflationary environment we're in. And we've talked about some of our completion rates on the calls, and we'll continue to do that. And hopefully, we'll continue to be able to close those contracts at reasonable rates going forward.

And as you've anticipated, I have to do a section on staffing. So yes, increased hiring has certainly helped you reduce contract labor costs. And could you take a moment to discuss your recruiting and retention initiatives with contract labor rates decreasing? Has turnover improved? And is it easier to...

It's another area that Mike and Jon lead for the company, I'll just intro. So part of our response, obviously, we hit our high watermark of labor in the first quarter of '22, mainly driven by the COVID surge. And as everyone knows, we had to utilize a high level of contract labor just because of the disruption that occurred in the workforce. And we've been very pleased with the progress since that time. We've seen sequential improvement in our labor dynamics, but it's through a lot of effort. And we have kind of a labor and capacity plan that's led by the operating team. We've invested in recruitment. We focused on reducing turnover. We've focused on capacity management through length of stay. And you've probably heard us talk a little bit, referred to it, our care transformation initiative, bring new models of care, of diversifying the workforce, whether it be through patient care, techs, LPNs. And all of that has led us to continue to see sequential improvement in labor. So Mike, I don't know if you want to talk about some specifics underneath those programs?

Sure. The one I would mention is length of stay, really important. If you look at first quarter of last year to first quarter of this year, we're down almost 5.1% on our length of stay. And that's really one of the main ways we were able to take on such a significant volume growth that we saw in the prior year. It's been really a culmination of the significant effort to drive people, process and technology improvements through our case management function and our length of stay management function. From a technology standpoint, we've rolled out a series of tools that are supported through data science algorithms that really help our teams identify the patients that have the best opportunity for discharge in a real-time environment. And then we put a lot of investment in our people. So if you think about the case managers in the field that are working this every day, we've elevated their leadership, we've invested in their staffing. And I think it's really helping us, from a people, process and technology standpoint, continue to focus on driving length of stay improvements. It will be a big part of what we do in the future as well.

And that's been a key part of us seeing reductions in contract labor. But we also invested significantly in our recruitment organization and resources. I think we've increased our recruitment resources 30% or 40% since kind of the COVID era. We've put in more technology. We've tried to ease the onboarding process. And I think we quoted our recruitment numbers were up almost 19% in the first quarter. We focused heavily with our operating teams on reducing turnover through employee rounding, employee resolution. Yes, we've had to make some market wage adjustments to respond to the market. And so it's our sense the labor market is improving and settling, if you will, from the disruption we saw during these COVID surges. And all of that, I think, has helped us reduce the utilization of contract labor. And hopefully, those trends will continue as we go through the year.