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

Sure. Let me just take it from an expense side first. In the context of other operating expenses, there are certainly some questions, discussion around other operating expenses in the first quarter. And that's where -- our state supplemental payment programs. From a year-over-year standpoint, we did see some increase in those supplemental payment programs, but it was as we expected, whether it's from starting an accrual methodology in the state of Florida, where we started that in the fourth quarter of last year, and we saw some additional expenses related to it, or a new program related to the state of Nevada that we recorded in the first quarter. We have some, from time to time, certain matters that create a little bit of choppiness. We try to get to an accrual methodology as quickly as we can, which we have confidence and good visibility into the cash flows under these programs. But that caused a little bit of an increase in expense on a year-over-year standpoint under these programs. And it's something that, again, we will -- we continue to feel like there's really a good landscape, good positive movement in these programs. We do think there'll be a small headwind year-over-year in terms of the earnings. We called that out in our annual guidance because of accruing Florida and because of some settlements that we had in the state of Texas. But we generally feel like that's the right spot from a guidance standpoint. We don't see anything structurally concerning in those programs right now, but that's how we're kind of seeing this year.

Tennessee is working on a program. Any additional color around that?

Yes. So we're aware of the program in Tennessee. I just mentioned that, that program has not yet been approved by CMS. And so once it has been approved by CMS, we can further comment on that program. But we are aware of it, and it seems positive, but we need CMS to approve it.

Maybe just to hit on some of the financial resiliency programs, you guys identified 30 of these different programs sort of in different stages. Which are some of the ones that you're the most excited about, Erol, when you look at your division and the success results that we're beginning to see out of those?

I think the case management initiative is particularly exciting given the results that we're seeing already, Whit. I think that we've seen significant improvement in case management when we look at the expected length of stay and then managing to the expected length of stay and ensuring that we don't have sort of excessive days that end up being excessive cost and patients in a hospital longer than they need to be. And so I'd say the case management initiative has come along really at a very good time for us because as demand has gone up, it's been really important that we create capacity within our hospitals, and creating beds by reducing the length of stay is the most efficient way to do that. It also helps you on the labor front as well as you're able to care for more patients with the same nursing staff because the patient isn't there a day longer. So I think David's got some examples of results in Austin on case management.

Yes. This is the second year in a row, '23 over '22, length of stay was down. Length of stay is down again '24 over '23. But our intensity, our case mix index really hasn't changed at all. So we still have the intensity, maybe see a little uptick in intensity, but we're seeing greater efficiency. So I think that's important. The other thing that's really helpful for us being part of HCA, with such a large organization in 43 markets, is our benchmarking initiatives. We're able to look at similar types and sizes of facilities in all areas around the country and learn from those and see where we have operating efficiencies. And so that will be big for us. I think there's a lot more to be yielded there.

Maybe just sticking on Austin for a minute since we got you here. What did St. David's look like 5 years ago, where it is today and where it will be in 5 years? Where are you allocating a lot of capital in terms of the areas that you're investing in?

Well, we're probably in a phase of the greatest sort of capital investment that we've had as a system, St. David's as a joint venture partnership between HCA and the St. David's Foundation locally. We have about -- the foundation of that is about 7 core hospitals surrounded by 125 sites of care around the market, urgent care centers, freestanding EDs, ASCs, those kinds of things. I would probably focus more, Whit, on 5 years from now. We have planned about $1 billion worth of investment in the market. Some of that is already online. A significant amount of that is sort of in the pipeline. We are planning a new behavioral health hospital in this market, 2 new acute care hospitals, one to the north of the market in Leander, one to the south of the market in Kyle. Those are submarkets that we're really not in at the hospital level. So those will help us capture the significant growth that we're seeing there. And then we have in flight 3 or 4 different large existing asset expansions: Round Rock Medical Center, North Austin Medical Center. One will start in the next year at South Austin Medical Center. So it's important for us to continue to create capacity at our existing assets. It's also important for us to make sure that geographically, we have capabilities in places where we aren't currently in rapidly growing areas. And then, of course, that's all really going to be driven by our ability to staff it, and we're seeing a lot of good news there.

Got it. Chris, is there any difference in the underlying utilization or care activity patterns of Medicare fee-for-service versus MA today when you...

Yes. I mean in terms of utilization, you know the backdrop. Obviously, there's more lives moving to Medicare Advantage. We got more Medicare beneficiaries covered under Medicare Advantage now than we do under traditional. And we're seeing that dynamic in our business as well. In the first quarter, 14% of our volume growth was in Medicare -- or we had 14% volume growth, admissions in Medicare Advantage versus we're fairly flat from a traditional standpoint. We did move into this new 2-midnight rule in Medicare Advantage during the first quarter of this year. That's something that in the traditional Medicare side has been in place for over a decade now. But we are seeing a little bit of an increase in admissions greater than 2 midnights under the 2-midnight rule. We think they're appropriate underneath this 2-midnight rule that we're operating under from an MA standpoint. So yes, we're seeing a little bit higher increase in admissions over to 2 midnight. It's not a significant portion driving that 14%. It's a relatively minor piece of it. So is there some slight increase in admissions because of the 2-midnight rule? Yes, but it's still a very small a portion of what's driving the growth overall in Medicare Advantage.

Yes. Just sticking on the topic of Medicare Advantage given that the plans are feeling their own strains right now. It's been described by others in the industry that they're seeing behavior change with some of the plans and -- whether it's post discharge denials or just making things more administrative cumbersome. I know just maybe elaborate more on kind of the friction that you see growing with some of the MA plans today.

I'll say from a Medicare Advantage standpoint, the 2-midnight rule, our early returns have been somewhat positive. Again, it's very early. We don't have a lot of claims that have been adjudicated. We've actually seen a slight decline in pre-authorization denials for our facilities at least. There is -- you're right. There's certainly friction in the process that we have with our payers, but we've seen it at a slightly lower level. But I will caution that, again, it's fairly early. We've not seen a lot of claims adjudicated. We had a bit of a disruption in claims adjudication with the change event during the first quarter that further challenges us seeing a significant volume of adjudicated claims. But the early returns are modestly positive for us.

Okay. There's been organizational change at HCA for the last few years. I think as Sam likes to tell me, he said to repopulate the talent pool. But I think that's also created like this desire to increase the speed to market, the agility. I don't know. Erol, do you just want to comment a little bit on some of the kind of broader organizational changes over the last 2 or 3 years?

Sure, sure. So with -- the change that happened about 1.5 years ago was going from 2 groups to 3 groups. One of the group presidents retired. Jon Foster moved to be the COO of the company. And so you had 3 new -- had 3 former division presidents moving up to a group level. And so that created somewhat of a trickle down throughout the other divisions. So in the American group, I have basically 4 new divisions -- 3 new division presidents. David is a veteran and been in his position a while. So it really created the need to pull folks up and have them maybe play up a little bit. I think the beauty of HCA is -- and I've been with the company for 31 years. A little bit of product of this is just the ongoing development sort of along the way, if you will. I think when I started 31 years ago, it was a little less formal and a little more just get the next job and sort of lean on the corporate resources and develop. But it got way more structured with graduate students coming out of masters in health care or MBA programs coming into a formalized structure of residency within HCA, where they're developed and they're sort of assimilated into both the company and the industry. And then a couple -- 3 years in for a Chief Operating Officer, maybe a little longer for a Chief Nursing Officer or even a CFO. There's a development program that's more formal for more of early careers where we're developing the talent. We're exposing them to corporate learnings. They're learning in the field. They're moving around the company. A fair amount of us have moved around quite a bit. So what I would say is I think HCA does a tremendous job of growing its own talent, developing that talent, promoting it and supporting through that promotion. The most recent transition really necessitated some pretty formalized orientation training, particularly for 3 new group presidents. So I mean the whole company hospital structure had new people managing it. Jon was there to support, and Sam's always there to support. And so we really formalized the orientation process, both to the field, but also from a corporate resource standpoint. We've taken that learning now. We're starting to use that on our large hospital CEOs, what we call E, F and G hospitals. They end up being our larger earners. And that worked so well. Now we're doing a version of that program for all new CEOs. And so I think the depth of development training, the opportunity to play up, I think one of the things unique about HCA is when you promote within this company, you tend to -- you're leaning on the same people you knew in your prior role from a corporate support function. You've got the same systems in your hospital. You have the same operating reports and discipline. And so it really creates, I think, for quicker transition for the ability to hit the ground running faster. But with the move and the shift that you discussed, I think it just necessitated getting more formal and learning. Sam likes to say we're a learning organization. And that level of disruption has created a learning and a discipline that I think we'll be able to carry forward.

Got it. Let me just see if there are any questions from the audience. I can keep going. Maybe just spend a minute talking about just the broader physician strategy and how that's evolved and the desire, willingness to employ, how you're partnering. Each market is going to be different in terms of like the pace of play and everything like that. But just like where you're spending a lot of your time in terms of developing that physician strategy.

Well, I presented this at the investor conference, so it's familiar to me, and it's -- it really is an important strategy for the company. Our physicians are our key partners, and they are differentiators in terms of what we're able to do as a health system. So we approach them as partners. There's about 45,000 physicians on our collective active medical staffs. And so one of the differences, I think, from an HCA perspective to some of our system competitors is they've migrated more to an employee-first sort of approach to their medical staffs, more of kind of a closed medical staff. We've sort of approached the market as being a bias towards independents. But there are certainly pockets of specialties like cardiology. They're more procedural and heavily weighted towards a hospital, where they've desired to be employed, and so we've employed more in that space as well. But I think it's -- less than 20% of our medical staff is employed, and so it's predominantly still independent. I think graduate medical education has been a big differentiator for us. We've been active in that space for 4 or 5 years now. We're the largest trainer of graduate medical education physicians in the country. That is both helping us support our hospitals but also creating a workforce for the future. And so we're partnering with physicians in that way as well. We don't employ a lot of primary care. Some of our competitors do. I think a surrogate, if you will, for primary care is our urgent care platform, which has proliferated in the last 4 or 5 years, really started materially in Dallas with the acquisition of the CareNow chain there. And now I think we're going to be, at the end of the year, 330 or so urgent cares across the country. And so that's sort of our way to step into a little more of the urgent sort of hospital-centric episodes of care that then feed downstream. And we talked about kind of our whole network offering and how that really -- each of our hospitals has a network around it that operates in their space. And then in a market like Austin, all those come together to be the St. David's HealthCare system. One of the things we focus deeply on is navigating patients across that continuum. So if a patient comes into an urgent care or freestanding emergency room, we can leverage that encounter to get them either upstream or downstream to an aligned physician that works within our health system. Good for the system but also good for the patient and their continuity of care.

I feel like I get a lot of e-mails from CareNow.

Yes. I'm glad you're a patient.

Many visits this year. Many visits this year. Just maybe talk about capital priorities this year. You've been kind of quiet on -- well, not too quiet. You closed a handful of acquisitions in the fourth quarter. Maybe more than I thought. But aside from that, I feel like some of the acute care activity has been a little quiet. Do you think we see maybe more development activity pick up?

Capital -- I'll just speak to capital priorities first. I mean we've said CapEx is going to be our first option in terms of our capital deployment, $5.1 billion to $5.3 billion this year. We're operating under a $6 billion share repurchase program and then trying to provide a reasonable growth in our dividend. From an M&A standpoint, we have found some of these what we call tuck-in acquisitions inside our existing markets. We haven't had anything in terms of a new market acquisition since Mission and then Savannah before that. So -- but we're finding opportunities within our existing markets, and Erol can speak to you because several of the recent ones have been in side of, say, the North Texas division, for instance, in Dallas, where we've been able to add some assets there. So we continue to look for those opportunities and execute them as we can.

Okay. With that, we've got about a minute left. I can just cut you guys loose. Is there any questions?

I probably should know this, but I don't, so I apologize. Within your capital allocation, can you discuss the amount of funds going to behavioral? Is that something that you're going to be using or employing a lot more? And what's the breakdown of behavioral versus -- I'm sorry, percentage of revenue, roughly?

So from a behavioral health standpoint, I would say we do have a few new behavioral health facilities that are coming online, a couple within Erol's markets in which he operates. So we are investing periodically in behavioral health capacity. I don't have a revenue number for you. I think to size it as a percentage of our emissions, it's about 5% or 6% of our -- the company's admissions overall. So that gives you some perspective on the size of behavioral health.

And just to be clear, this is not something that you would prioritize relative to other needs of the acute care hospital?

Well, I think it goes into the mix of considerations for us as we think about, for instance, our ER strategies. There's a linkage there between ER and behavioral health and making sure we have the right amount of capacity there. So it is certainly in our sights and in our thinking as we think about our capital allocation.

Okay. Well, guys, I'll get you guys out of here. All right. Appreciate all the time.

All right. Thank you.

Thank you. Appreciate it.

Thank you, Whit.