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

Well, if all things stay what we think, yes. Unfortunately, all things don't stay equal. And we have to navigate through different events, whether it's staffing shortage, physician fee pressure, what have you, and we try to adjust to that. But if all things stay the same, Kevin, with respect to no unusual policies or no unusual pressures, we do see opportunity. We have untapped potential, we believe, in our business. And our opportunity to get that is really centered around 3 areas. One, our digital agenda that we're implementing as a company includes changing out our clinical system, moving more information to the cloud, leveraging big data in ways that we haven't, and then I know everybody says it but it's real for us using artificial intelligence to support our business is a potential game changer for us because we have so many humans involved in process and that yields opportunities for us to narrow variation. Additionally, we think we can gain greater visibility into the processes that take place and then use this incredible proprietary, large proprietary database that we have to extract the learnings from the patterns. We have all kinds of patterns and our ability to learn patterns is limited by us as humans but with the machine, we have an opportunity to learn from these patterns year-on-year on year-on-year. And that's going to help us administratively get more efficient and better, operationally get more efficient and better. And then clinically, it's the holy grail, we believe, on the clinical side in supporting our physicians, supporting our caregivers and really improving the outcomes and the environment for safety for our patients. So we are going aggressively into that. That's going to help us unlock some of this embedded value. The second agenda, and Mike can speak to this, if you want, is our financial resiliency agenda which, again, is being informed a lot by data. It's being informed by benchmarking. We're finding new opportunities to leverage certain things in our company to help us generate reductions in our fixed cost better performance in our variable costs and really move our agenda on that front also. And then the workforce development agenda that we have as a company with our Galen College of Nursing, with our graduate medical education programs and so forth, are going to allow us to integrate the next generation of talent into our company culturally, systematically in ways that we think are going to be more efficient for us. So all of those things we believe, in addition to our normal provider growth model in the market that we previously spoke to, give us an opportunity to generate margin improvement, assuming we don't have somebody stroke of the pen and change the reimbursement methodology or something like that. So we're pretty encouraged about where we are, and we now have what we believe to be a pathway and a set of initiatives that's going to unlock this potential that we see in our company.

I guess you guys had your Investor Day first time, in long time last year, and one of the things that kind of surprised me, 4% to 6% growth has been a great guidance number that you guys have been holding on to for a long time, but you guys have been delivering from an EBITDA perspective, 6% to 7% over the last 5 years, 10 years, 20 years, like any CAGR you'd want to look at, you guys have been doing 6% to 7%. When you look at the CBO forecast for hospital spending at 6% for the industry over the next 10 years, you guys are in faster-growing markets than the average industry. You have better capital, you're investing and gaining share. Why is 4% to 6% -- like 4% to 6% seems to me to be like the low end? Why isn't it 6% to 8%? Is it just that risk of stroke of the pen that you don't want to get ahead of? Or is there...

I mean there's a lot of variabilities. We're going to produce as much as we can possibly produce. If we can get to 8%, we're going to produce it, if we can get to 10%, we're going to produce it, if we can only do 5%, that's sort of how we think about it. It's a range, Kevin. Do you want to say that it's conservative? Maybe but we felt it was the right thing for us to guide at that particular point.

So I can't get you raise guidance on the -- that's why I try to do throughout the day. I [ just got ] want to raise long-term guidance. But so far, no one's been on it, but we'll keep trying. But I guess maybe you can help maybe debunk some of the miss that I hear about hospitals. I often get generalist investors saying, well, wait a second, do I want to own hospitals to begin with their capital-intensive businesses, volumes trying to shift out of the hospital in a lower cost setting. So there's a structural demand issue there and then your fastest-growing part of your business is Medicare, which is lower margin than commercial. So like how do you think about that? I mean those things aren't untrue, but the long-term growth, as I said, 6% of top line growth, that demand is there. So how do you respond?

Our average daily census for our inpatients since 2012, we're up -- it's up 27%. I mean, 27%. So wouldn't [ Mark Twain ] say, the rumors of my death are exaggerated. That's what I say about inpatient hospital business. That -- I mean people are aging, chronic conditions persist, new technologies support inpatient demand, and then you've got population growth as well. And so I understand the discussion but I think the evidence has proven itself. I think our company is unbelievably durable. We're diversified geographically. We're diversified from a service standpoint. And it's our belief that demand on the inpatient side as well as demand on the outpatient side is growing. And we are positioned with our network model to really benefit from that growth. So I think also the patients that we do see are more acute and have more complex conditions. And that connects back into our strategy where we're trying to build out even more capabilities clinically with the services that we offer so that we have more critical care capabilities. We have more comprehensive cardiac programs, more transplant programs. All of those kind of things are really connected to what we see happening with demand. Obviously, if it shifts to Medicare from commercial, that's not a great thing for us but we've been able to prove that we can manage through that because we have tremendous, fixed costs and that fixed cost is leverageable even with a Medicare patient. And so how we manage capacity with length of stay, how we use our scale as an enterprise or even within a community helps us to navigate through some of those components. But I mean, when I look back and I hear in 2011 when the Affordable Care Act was passed that hospitals were going to become cost centers. And then I'll look at the fact that we have grown our inpatient census by almost 30% during that time period, it sort of belies the point. Our CAGR for inpatient revenue is the same as our CAGR for outpatient revenue. So this myth that outpatients 2x, 3x or growth of inpatient, certainly has not been our experience.

And why is that though? Because you guys have been investing in outpatient. I would think that the number of hospitals you've been operating for the last 5 or 10 years has actually been pretty consistent around 180. You guys have bought assets and sold assets, and so that's been consistent. But the outpatient assets have grown at least a number. So why hasn't outpatient revenue growing much faster than inpatient revenues seems to be where the investments are?

Go ahead, Sam.

No, go ahead.

So I think I would -- Sam mentioned this network, and it's a funnel. And so if you think about kind of having the assets, the outpatient assets in the marketplace, and we serve the patients where they are, that creates a funnel into the inpatient as they need more acute services. And our investments in the freestanding emergency rooms or hospital-based emergency rooms, and the ability to really kind of service the needs of the public, I think you'll see that pull-through. A lot Of hospital systems over the last few years have not invested in their inpatient capabilities. They've been focused on outpatient. We've been taking a very kind of balanced approach, not only in terms of our service line development, but also in terms of capital. And if you look back over the last 10 years and the way we use our capital investments, it's been pretty balanced between adding inpatient beds, adding emergency room and operating rooms but then also adding outpatient facilities. And so I think it just reflects the demand in the marketplace. There is this myth that there's just not growing demand for inpatient services. That myth has not played out in the markets that we serve. And I think our strategy over the last 10 years of staying focused on being a comprehensive provider of services to a marketplace has allowed us to capture that demand, both on the inpatient and the outpatient side.

Our part of the revenue growth on the inpatient has been, again, the acuity of our inpatient population. I don't know what it is off the top of my head but if I go back to 2012 to today or 2014 to today, it's grown significantly. So that helps with our revenue turnover because we have more acute services to offer in the patient cohorts that we have are sicker, it yields some growth on the inpatient side. So all that sort of embedded in that discussion. If you pull up to the highest level, Kevin, inpatient demand in our markets has grown about 1.5% over the previous decade. We forecast that it's going to grow somewhere between 1.5% to 2% over the next 5 to 7 years. We actually see a little bit of acceleration in inpatient demand as we push through the rest of this decade.

Okay. Great. And then, I guess, shifting a little bit. You mentioned stroke of the pen risk that you're kind of worried about. They've actually gotten some nice tailwinds recently on a supplemental payments. I mean there's been a bit of debate within the investor community about like, well, are these things sustainable? Or are they potentially at risk in the future? So how do you view them when you are talking to the states about passing these things, what -- how are they thinking about it?

So we have supplemental payment programs now in 18 of our 20 states, including 3 or 4 fairly new programs over the last 2 or 3 years. Those new programs have been approved on a consistent way by CMS. From a risk standpoint, the other thing that I'm encouraged about is the new rule that CMS just posted on supplemental payments. This is the first new rollout based in 2015. Generally speaking, we view the new rule as favorable to providers and provider health systems. And if I had to just call it right now, there's no such thing as a zero risk environment but the policy and regulatory support for supplement payments is strong now. I think states in the federal government's view supplemental payments as a way to protect providers for Medicaid. And we really view these supplemental payment programs, they're really just part of our Medicaid net revenues in really core to operations. So I'm actually encouraged compared to the past related to both the stability and the policy structure that supports supplemental payments in our markets.

The other thing that's been going on in Medicaid redeterminations. How are you guys thinking about the impact of that? Has that been a tailwind? I mean it seems like that could potentially be a tailwind.

It has. It's been a modest tailwind. I wouldn't call it material. The redetermination process for Medicaid really kicked in the back half of last year. As we study revisits of that population into this year, we're still seeing 75% to 80% of the patients come back with Medicaid. So they're making their way through the redetermination process. If you think about that 20% that were -- that we see losing Medicaid through the redetermination process, about half of those are showing up with other forms of insurance coverage, employed sponsored insurance, health care exchanges, even Medicare, and then the other half of that 20% is uninsured or self-pay. And then we're taking that population back through the Medicaid eligibility process with the states. And so over the next 4 to 6 months, we'll get a sense for how many of those are able to get back on the Medicaid roles. But the net effect of all that would be a modest tailwind for the company so far. And you'll see that kind of catch up to itself at the back end of this year.

Okay. And I guess when I think about election risk, it seems like Biden is generally supportive coverage but you never know what Trump might do. But if we saw the subsidies expire in 2026. Is there a way to think about how that might impact the company? Does that involve -- does that result in a volume headwind? Does it result in a payer mix headwind? How should we be thinking about the risk there?

Well, if it goes away, it would be the subsidies that is, it would be a bit of a payer mix tailwind. We don't know to what degree yet, how many of the people would actually migrate back into the exchange without subsidies, how many might migrate back into employers, how many might migrate back into Medicaid. We don't have a good sense of that yet, Kevin, because we don't have complete visibility into the mix of folks in the exchanges. But I think it's reasonable to assume it'd be a modest tailwind (sic) [ headwind ] in our payer rate.

Tailwind?

Headwind, I'm sorry.

Yes, okay. How much is -- of your volume is exchanged?

7% in the first quarter of total admissions.

Okay. And then you guys have a great balance sheet, great cash flow. You bought back $1.2 billion of stock in Q1. So like how do you think about capital deployment?

Yes. If you think about the power of HCA, you combine this annual growth in operating earnings through adjusted EBITDA, which is all the work that Sam talked about earlier, coupled with a really disciplined approach towards capital allocation. And you think about 45% to 55% of our operating cash flow will be invested back organically into our markets through capital investments, we support a modest dividend that will grow a little bit every year. And then the balance of our free cash flow, we tend to do share buybacks. And we think of share buybacks as some of the best investments that we can make for our shareholders and for the company. I think that will be fairly steady as you see us moving forward. The good news is with our operating growth, we grow our operating cash flow every year that gives us immense flexibility and optionality as we think about opportunities in the marketplace. But I think what you've seen in the past will continue. We're on track to hit the guidance level that we gave at the end of last year, both for capital investments and for share buybacks for 2024.

All right. Great. That's all we have time for. Thank you very much.

Thank you.