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

Good morning. Welcome to Oppenheimer's 34th Annual Healthcare Conference. I'm Mike Wiederhorn, health care services analyst. It's my pleasure to introduce HCA. With us from the company is Bill Rutherford; Chief Financial Officer; and Mike Marks SVP of Finance, incoming CFO. Bill, congratulations on upcoming retirement. One more note before we jump into the fireside [Operator Instructions].

Thanks Mike.

So lets just start -- we'll start -- we'll jump right in kind of a broad question here. Can you just provide us an update on the business and how you feel coming out of Q4 into the new year, som just general high-level comments?

Yes. I mean I think as we went through '23, we felt we were gaining momentum and we're very pleased with the operating results of the company during the course of the year. When I think about that question, I kind of walk the income statement, if you will, where you see -- where we'll feel like there's good volume demand trends that we're seeing. Our adjusted admissions grew, I think, 4.8% in the year. Our inpatient admissions were up over 3%. So we think fundamentally, we're well positioned in the market. We see good trends, population growth, we see good enrollment in the health insurance exchanges. Our strategic initiatives with certain assigned expansion, physician recruitment and capital investments are all part of the equation. So we see, I think, good demand in the markets. I think about we saw good payer mix, as I said, with a good enrollment in the health insurance exchanges. We continue to see advances in our acuity trends. We think we're well positioned from just an overall pricing and contract positioning on there. So I think that portends good things for us. We were very pleased with the labor trends we saw throughout '23, especially coming of the period of disruption that the industry occurred in 2022, continued improvement in our utilization of contract labor. Our turnover is down, our hiring is up. Supply trends have been really stable. We did, as we talked throughout '23 have to deal with increased pressure on our professional fee line, but we were pleased towards the last half of the year, the sequential rate of growth that started to moderate on there. So we felt we're well positioned coming out of '23, and we incorporated that. And hopefully, you heard that in our '24 guidance that we laid out.

Great. So just to go a little further on admission trends, do you think we're seeing any temporary elevated patterns through the deferral of care? And how are trends in Medicaid versus MA and versus other....

Yes. It's hard for us to digest exactly why we're seeing -- my belief is it's not as much a deferral of care, especially if you're related to care that was deferred during COVID, I mean the last COVID surge we had was January '22. So time has passed. I think if people were deferring care that's likely washed through the system right now. I think there're just good fundamentals. One, our markets enjoy great population growth during COVID, obviously, with our presence in Florida and Texas. I think we still are in a very strong employment environment and there's a strong correlation, I think, between employment and economic trends with health care demand. And again, I think our strategic initiatives our paying dividend. We saw share gains as we went through the most recent cycles, our capital investments, our physician improvement, our service lines. So I believe it's more of those kind of macro trends than any deferred care that we're seeing. There may be a little bit of that, but it's hard for us to discern. But I think it's mostly just strong fundamentals that we have in the marketplace and a reflection of how we're positioned in front of that.

And are you seeing any difference in like MA versus Medicaid versus commercial?

Yes. Well, yes, let me speak to that. So first of all, we saw really strong commercial growth, as I mentioned. I think that was fueled with the enrollment in the health insurance exchanges. Our overall Medicare book grew I think, 4% or so. But our MA book grew, I think, probably 10% to 11%, pretty consistent throughout the year. And I think there's a combination of factors in that. I think just continued conversion from fee-for-service lives in MA was probably the primary driver of that. And there may be some utilization trends in there for us to exactly see utilization trends. But our MA book grew pretty consistently throughout the year. We did begin to see in the last half of '23 some declines in Medicaid that we think are largely probably due to some of the Medicaid redeterminations on there. Some of those are in a pending status as we go through trying to search for eligibility in them and hopefully, they'll regain Medicaid. Some of those, we believe, found their way into both employer-sponsored insurance as well as the health insurance exchanges. So there may have been some modest benefit due to that. But overall, we're pleased. And I think the payer mix trends we saw characterized will be net-net positive.

On the Medicaid determinations and kind of when you think about the health insurance exchange mix, how should we view the impact on the business from a net perspective?

Well, I think this is modest benefit is how I would characterize and I think what we're seeing -- and again, it's still relatively early, been in the last half of the year. We're actually seeing a larger portion than we anticipate, a larger percentage of those people who lost coverage, able to regain coverage. They may have been dropped for a tactical reason, they didn't fill in their applications. And as we go through the eligibility, we're seeing a decent portion of those, maybe 2/3 actually be able to regain Medicaid coverage. And then the balance, we're seeing probably mostly into the health insurance exchanges. I think it's probably 20% to 30% as our initial indication. The numbers are still relatively small. So again, so we think there's some modest benefit from that. And we'll need more time as we go through '24 to see that fully ramped up as you know, different states were implementing that or executing at that at different, different levels. So we'll continue to watch that and let you know what we're seeing as we go through the year.

Perfect. You mentioned market share trends. When we think about the pandemic impact on your share gains, how do you think that affects your ability to gain additional market share going forward?

Well, if I go pre-pandemic, we historically see, call it, 20 to 30 basis points of share gains a year. I think we went from 23% deposit share probably a decade ago in 2014 or so, up to roughly 27% now. Obviously, COVID interrupted that, and put a lot of noise in that. Now we're starting to see that settle. We think we're generally well positioned for market share gains. We saw some gains as we went through the COVID cycle. We think we're going to return back to historical demand patterns, and we'll see how that happens. So some markets gained a greater pace than others. We had a few markets that were flattish. So as a composite, I think we're well positioned to continue to see market share gains going forward.

Okay. Makes sense. When we move over to thinking about acuity trends, do you think you're at a steady state? And how does the addition of new programs like stroke centers, trauma programs, is that playing into that and kind of your overall picture of what kind of -- how you're positioning in the business going forward?

Well, we saw some slight increases in case mix. We're very pleased with that. As we went through COVID, as we talked about, we saw really strong acuity as measured by case mix and that was largely driven, in my view, with the lower acuity business staying away and where we're left with higher acuity, and we saw really strong acuity gains during that period of time. But as we came out of COVID, our goal, honestly, was just to maintain that level, and that was positive. And we saw that through '23, with some modest gains. A lot of our strategies, not the majority of our strategies are focused on deepening our clinical capabilities, i.e., providing higher acuity service. So I think we're well positioned as we expand acuity. In cardiology, as you talked about, whether that be through -- or through neurosciences, through stroke programs, through trauma programs in the emerging rooms or expansion of our neonatal intensive care units. So a lot, if not most of our strategic initiatives are intended on deepening our service line capabilities, which generally brings a higher acuity service mix with it.

Kind of shift gears over to contracting. How are rates trending in the managed care negotiations? Are you handling the renegotiations any differently, given inflation and how it entered into the system in recent years?

I'd say pretty stable. I mean, we're 80% contracted for this year, maybe a little north of 30% for next year. We're able to secure contracts, we're in line with our expectations, as we said, it's kind of mid-single digit. And we tend -- I tend to look at the pace of being able to secure those contracts. We're able to secure those contracts in cycle. So I would characterize it as stable. We began to see some efforts on our part when inflation hit in '22, and we're able to continue that. So I think we're generally well positioned, both in terms of access within the terms as well as the pricing adjustments we're able to achieve.

And also with the -- on the managed care side, on value-based care, kind of what are you seeing there? Are you seeing changes in structure? Are you seeing more of these contracts being pushed forward to you at the table? Kind of can you give us some....

No. No material changes in there. I mean, we have -- our contracts have some aspects of some benefits to pay for performance, trends and measure, but it's a very small percentage. So I would characterize, we don't see any kind of material changes to those structures or any major push to take more risk or move more into this fee-for-value kind of arrangement. I could say there's no material trends in that.

Okay. So breaking down kind of contracting and looking at revenue per adjusted admission, how should we be thinking about it when we look at it through different -- the payer mix, through Medicare or Medicaid, commercial, different components and how -- the strength of it, how should we be thinking about that positioning throughout the year?

Yes. Well, we've targeted 2% to 3% growth in our composite revenue per accrual admission. Three primary factors that go into that. One is you start pricing adjustments where we see both updates from our governmental payers as well as our commercial pricing increases. And we think we're well positioned and, as I said, we've good visibility into that. The second piece becomes our acuity trends. As I said, we'll continue to be focused on growing our higher acuity services. And then third is the payer mix component. And we've seen very strong, very favorable payer mix, again, fueled by health insurance exchanges. It's fueled by, I think, a strong employment economy that we're in. So we think we're well positioned to achieve that 2% to 3% growth. And hopefully, there'll be some periods we can be on the high end of that, some periods may be not allowing. But for planning purposes, 2% to 3% composite is pretty good; estimate for us, and we think we're well positioned to achieve that.

And the visibility -- kind of the visibility into the managed care book, how is that? Where are you at right now?

I've said we're 80% contracted for this year. We're a little north of 30% contracted for '25. So we've, I think, good visibility, at least in the short term, intermediate term.

Okay. Sticking on -- staying on the revenue and rates. Supplemental programs, kind of can you give us an update what you're seeing there, what are you seeing in terms of changes or new programs across key states? Any color that would be...

Yes. Well, I think as we talked about in our year end call, we've seen -- I think we've supplemental programs in 18 of our states right now. We saw new programs in North Carolina in '23. We're anticipating a new program in Nevada. These programs are large right now. They're an important kind of part of just health care ecosystem in those states designed to compensate for some of the traditional underfunding to Medicaid. Many of these programs are large, there are nuances out there. I'd characterize most of the programs as stable. I mean, they're always subject to some changes. We did benefit in '23 through some recognition of some retroactive parts of those programs. So we laid out our guidance of potential $100 million to $200 million headwind just as a -- on an as-reported basis. But we think they're mostly stable. We see these programs in Texas being kind of our largest and most long-staning program, the North Carolina program, we had a new program in Georgia that started in late '22, the Nevada program. So again, I think it's an important part of just the overall Medicaid funding. We disclosed in our 10-K, there's probably about $3.9 billion of revenue across these programs. So they're an important part of the funding mechanism that occurs. Again, each state has a little bit of a nuance in terms of how you recognize it and when you recognize it, but I characterize it outside of just kind of the headwind as we've called out and most of those programs are pretty stable.

Okay. And do you have any additional thoughts on the upcoming regulatory season on the Medicare rate side? Are you just trying to be specific from either inpatient or outpatient or more status quo from that perspective?

No. I think our position now is more status quo. I think we historically land 1.5% to 2% rate increases when you factor everything in for Medicare. We'll have to wait to see what the next update occurs, but my belief it's probably going to be in that range. It has for a long time. There are some periods, it's a little higher and there are some periods, it's a lower, but I think 1.5% to 2% governmental rate increases is kind of what's embedded in our long-term planning. But right now, I don't have any insight into any other major changes on there. Obviously, as we go through the election cycle, there's always chatter that's going to occur, but it's hard to get anything really materially pass through, but we'll continue to keep our eye on.

Okay. Shifting gears, hot topics has been the 2 midnight rule. Can you kind of give us kind of what you've historically observed, kind of where to shift? And how is that changing your business and you're seeing -- and how is that -- how is it dealing with the insurers as well in this?

Yes, I'm going to let Mike take that.

So the Medicare 2 midnight rule, as you know, was applied to Medicare Advantage on January 1, 2024. As we discussed in our fourth quarter earnings call, we expect this to be -- take some time for the Medicare Advantage payers to adopt this new rule and let it process through. We're seeing that as we go through the year. It's taking them a while to adjust their processes and procedures to really kind of see the end results we're expecting. We do expect it to be positive for hospitals and frankly, for Medicare Advantage members and patients as well over time. But it's going to take a while. This is a pretty material change to the processes for the Medicare Advantage payers on how they review it and kind of do their medical necessity reviews and the life related to which patients would be inpatients versus observation patients. So it's happening about like we thought it would. I do think over time, it's going to be a modest positive for the hospital side and again to the Medicare Advantage patients, but it's going to take a while for us to see it as the payers adopt.

Dealing -- sticking on the payers, staying on that subject matter, there's been a lot of talk, obviously, with pre-authorizations, denials there's been the news a lot. What are you -- are you seeing any changes or what are you seeing currently? And do you see any changes going forward on the pre-authorization and denial process?

Yes. There's no question. There's been a lot of concern in the industry, especially in the Medicare Advantage side about its level and growth in pre-authorizations. And I was -- and frankly, [indiscernible] generally. And so it's a topic of conversation between frankly, all promoters and all payers. And we're working with our payers carefully to make sure that we get paid fairly and appropriate. And we have routines and processes to help us do that. The 2 midnight rule was designed, frankly, in the Medicare Advantage side to help reduce the amount of administrative denials related to patient status. And I'm still hopeful over time that it would do that. So I think that's a positive thing. Mike, I think we saw what I think widely been reported in the industry that probably late '22 throughout the course of '23 we saw denial rates increased throughout the year. I think during COVID, many of the payers turned off a lot of their pre-authorizations and their denial and added and recognized the turmoil the industry was going through. So they relaxed a lot of that in '23 to the benefit, and they turned a lot of those back on once we came out of COVID. And so we, I think, along with the industry starting to see increased denials, increased utilization activities. Mike is actually leading out where we've got a tremendous amount of resources dedicated to being able to counter those denials. And I think we're in much better position than many systems just given our size. We try to advance really strong and strategic relationships with our payers. But it's an issue that the industry is dealing with and we're dealing with. And hopefully, like we said, if some of these policy regulations can provide some more clarity on there, like the 2 midnight rule is intended to be a bright line of when a patient qualifies for inpatient status versus some subjective criteria that net-net will be a positive for the industry.

That's good. Let's move over to the cost side of the formula here. At your Investor Day, you discussed about $600 million to $800 million annual cost savings over the next 5 years. Obviously, you're still early in this time line. Can you give us any updates you can provide there and kind of where the status of these initiatives are on?

Yes, I'll let Mike bring this, he's leading, but we kind of put -- broadly call our resiliency programs that has a number of initiatives underneath it from what I'll call our next generation of shared services that are in the process of implementing. An example of that is lab consolidation efforts that we've had going on through our markets. Another example of that is efforts around consolidating some of our environmental services, Food & Nutrition. We have efforts around benchmarking and we have efforts around this integrated revenue cycle. So all of those are in flight. They're probably the earliest one with the most traction is our work to reduce premium labor spend. If you look at 2023 is a good example of this. Our contract labor was down 20%. And I think as you think about the height of COVID, our contract labor as a percent of SWB was getting close to 9% at the height of COVID and surges. And we were able to get that down into 2023 to just over 6%. That work is really reflective of a much stronger retention of our clinical workforce, especially our nursing workforce. A lot of efforts around recruiting to backfill the premium labor with new nurses. A lot of structure around the supply of nursing with adding academic affiliations with nursing schools, the Galen School of Nursing and the like. So that whole area around reducing premium labor spend is a great example of the resiliency project in flight. The other one that we highlighted at Investor Day that continues to demand a lot of attention is our length of stay and manage that routines to case management. As we noted in our Investor Day and in fourth quarter, we were able to reduce our length of stay by almost 3% in 2023 versus 2022, predicting the equivalent of almost a 500-bed hospital of new capacity without spending $1 of capital. So this -- the length of stay efforts that we have are deep and broad and continue to produce good results for us as we move into 2024. So 29 work streams across all of our cost sectors. Those were 3 or 4 that we mentioned, and we're excited about our resiliency programs that continues to mature into the future.

So dig a little bit more on the labor front. Can you kind of give us an update where you are on labor right now, kind of the contract labor or rates at a steady run rate? And how should we be thinking about that going forward positioning-wise?

Yes, I'll take a stab, Mike can add in. I'll characterize labor market as stabilized, especially compared to what we saw in 2022 and so we believe, as Mike just talked about, there's continued improvement to be had in premium labor and we're working diligently on that. We're working diligently. Our turnover rates are down, they're almost at pre-pandemic levels. We've invested heavily in our recruitment and retention. We're seeing our net hires go up. So all of those go into play with the market kind of settling. So I think labor trends will mostly be stable, guided to keep our labor costs in line with the revenue, probably wage inflation somewhere around that 2.5% to 3%. And all that's manageable within the context of our trends. So we're pleased with the results we saw in '23, and we believe in '24 we'll be able to manage through that as well. So I think it's mostly stabilized. I mean, obviously, we always have to deal with some markets tier and their geographically, but we have the size that we can manage through that. But we continue to work very, very hard. We have a lot of our initiatives. As we came out of COVID in early '22, the organization was intently focused on that. And I think our results proved that we've been able to be successful there.

Keeping on costs. Can you give us an update on the Valesco and kind of physician costs in general?

Yes. I mean obviously Valesco was a topic of conversation throughout '23, kind of gave you our guidance, I think, in our year-end call that we do expect some sequential improvement in Valesco as we go through '24, as we're deeper integrated into HCA. We're looking at, are there opportunities to reduce redundant overhead costs. We're looking at revenue enhancement opportunities. We're looking at program adjustments where necessary and we'll think we'll be able to improve the run rate of Valesco. Strategically, it's important that we managed and took control of those programs in light of the bankruptcy that Envision was going through. So strategically, it was an important move for the company and we're going to further integrate that. And we actually think that it gives us an operational capability that is other programs-based challenges that we'll be able to integrate other programs into that structure that we're building. So again, I think for '24, we're expecting to keep the full impact about consistent with what we saw in '23, but we only operated for 9 months of '23 versus 12 months in '24, so and imply some incremental improvement as we go through the year. And again, I think it will just be embedded into our normal run rate.

Winding down here, got a couple of more minutes. And one, obviously, headline has been Change Healthcare. It's obviously having significant implications across the health care spectrum. So just wondering if you can touch on what you're seeing and how you're dealing with it? And cash flow impact and so on.

Well, obviously, it's a big issue. The whole industry is having to deal with. I'll say from the get-go that we've had no impact on patient care and we don't think, at least what we know now there's going to be any material impact on HCA. We think we're well positioned. Our teams have worked very diligently. We did use Change Healthcare in their product for a large portion of our billing system, our billing interface system in there. We have worked diligently over the past 2.5 weeks to convert to another vendor. We're now almost fully converted to another vendor. So there will be some temporary cash flow impacts as we went through a week or 2 with holding bills as we went through that conversion. We were very fortunate that we already had an established relationship with another electronic billing vendor. And so our teams worked tirelessly to convert those over into a new -- and now we have claims flowing. So we're able to manage through that. It will have some short-term liquidity honestly, but we've got this liquidity -- short-term cash flow impact, but we've got the liquidity to manage through that. So no material impact for HCA. And again, our teams have kind of reestablished building interfaces with another vendor. So it's unfortunate that the industry has gone through that, but we, I think, are much better positioned than many others to weather through that.

Are you seeing any changes in procedure rates due to the waiving of your authorizations?

Mike, I'd say maybe early on, there are a lot of manual processes that we have to go through. But I think they're mostly getting reestablished to historical trends. I don't think we're going to see any material or notable at the end of the day changes in authorization rates as a result of this.

Okay. We've got 1 minute here. So last question. I just want to talk broadly about your capital deployment priorities. Anything that you would like to touch on there?

Well, as we've laid out in our guidance call, our first priority is to make sure we have the capital to meet the growth opportunities in our markets and that's through our internal capital investment program. We think that we have that size well. It is growing in '24 versus '23. And I always tell people you look at that as a signal is the opportunities we see to deploy capital for growth. We still see great projects with really strong returns, and we have the capacity to fund those, and that contributes to the overall growth of the company. Our second priority is to maintain the balance sheet in a strong position. We're operating our leverage at the low end of our stated range, and we think we're in a really strong position in there. We have small increase to our dividend and then we dedicate a portion of our capital into share repurchase programs. And so I've always characterized it I think that's a very balanced and disciplined approach to capital that. I think it contributes to long-term value creation, and we think we have a track record of doing that. So capital investment to be growth opportunities, maintain the balance sheet to be opportunistic, continue to pay a small dividend and then the balance goes into a share repurchase program, which we believe is a value in the future.

Well, we're out of time. I appreciate it. Thank you again, and good luck on your retirement. And Mike, we look forward to things together in the future. Thanks again.

All right, Mike, thanks for your time. Thanks, everybody.

Bye-bye.

Thank you.