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

We'll get kicked off here. Mics are on and everything. So hi, everybody. I'm Lance Wilkes, health care services analyst for Bernstein. Really appreciate a fireside chat with HCA. And so please submit questions via Pigeonhole as you like during the session, I've got a tablet up here. We've got a series of questions we'll go through. Again, the orientation, a lot of the investors here will include portfolio managers, who are interested in the long-term story of HCA. So maybe as I kick off, Sam, if you could just introduce yourself and kind of frame the company a little bit, and maybe the pitch as to go what's the strategy and the vision for HCA? And then we can kind of walk-through strategy, some near-term operating questions and long-term setups.

Sure. I've been CEO for 5.5 years. I was Chief Operating Officer prior to that for about a decade, and I was a Group President, and I was out in the field. So in HCA, you sort of move around. We're a company that has a lot of tenure with our executives. Many people start their careers and end their careers with the company. And I think that in and of itself a testament to the unique culture that we have as an organization. At our Investor Day just recently in November, we talked about the unique staying power of HCA, and how it's sort of been able to sort of push through different cycles, different policy environments, different competitive dynamics and so forth, and really come out on the other side of it, a stronger organization, making the appropriate adjustments as necessary, but never really deviating from the core. And the core of who we are as a company, Lance, is that we're a hospital-centric health system. That's who we are. I mean we depend on our hospital systems individually within each market. We operate within 43 U.S. markets, 1 international market, mainly Central London, but a little bit beyond Central London. And so each of those markets has a set of circumstances that we need to nuance around regulatory, competition, demographics, whatever. And -- but the power of HCA, I think, comes in the fact that we can marry up those local systems with the national system bring a differentiated set of attributes back to the local market. So we use our national center -- our national system capabilities to create economies of scale with consolidation of administrative functions, we use our enterprise to create opportunities for identifying best practices, which we will transport across the company regionally or even nationally. In some cases, and then we've been able to use the company's balance sheet if you will, in cash flow generation to invest, we think differentially in our local systems. And so that formula has produced really strong outcomes for HCA. If you look back over time, and this is a business that takes time to develop and evolve. If you look back over the past decade, we've grown our market share as a company from roughly 23% to north of 27%. It doesn't sound like a lot, but in the aggregate that significant growth for us as an organization. During that past decade, Lance, we did some inorganic transactions that helped the profile of the company. But in the near term, we really haven't had that same opportunity. So it's been about building out our local systems, which is our first sort of pathway to growth as we push through the rest of this decade is really expanding our networks locally to take advantage of what we think is a unique portfolio of markets that are maybe better than average. I mean Florida, we're really large. Texas, really large. #1 or #2 system in all the major communities in those 2 states. We're also large in Nevada, Utah, Colorado, South Carolina, Tennessee, places where there's a lot of growth in the country today, and we're benefiting from that. So expanding our networks and creating a large ecosystem around our hospitals is what we're focused on in each of our different divisions. And that's allowing us to add outpatient facilities very significantly to our networks. Today, Lance, we have about 2,500 outpatient facilities that translates to 12 to 13 outpatient facilities for every hospital. That's not a formula per se, it's really an outgrowth of the model that we think is necessary to create the convenience and the value for our patients, but integrate downstream into our hospitals. The second part of our growth trajectory is something we're calling operational transformation. And within operational transformation, transformations word I don't like using. But I think we're at an inflection point as a company, where technology and new digital tools that continue to evolve have real meaning inside of our organization. And so we're investing heavily also in our operational transformation agenda. It includes a technology element that we think is going to allow us to gain better insights into the processes that we have within our company. It's going to improve our administrative function and really our ability to manage the operational aspects of our business. And that's going to produce quality improvement for our patients, a better place to practice for our nurses and physicians, and we think more efficiency and better insight into managing the business as an organizational value. So we're pretty excited about that component. The second component of operational transformation is around workforce development. We need people as much as we need capital to expand our networks, and we are investing heavily in workforce development, really around 3 areas. Nursing with our Galen College of Nursing expansion that is going on. We acquired a nursing college in 2020. They had 4 campuses. We're up to 20 campuses today. We'll be up to 30 campuses by early 2027, making us one of the largest, if not the largest educator of nurses in the country. That's important to our ability to meet the demand that we see in our markets. We're also investing in graduate medical education for physicians and then leadership institute for leaders because we need capacity in all 3 of those. And then the last pathway to growth, Lance, for us is really with the value creation we see with the optionality we have with capital allocation. We produce a lot of cash flow. We're able to use a large piece of that cash flow to invest back in network expansion or invest back into operational transformation. But then we have opportunities to use the excess capital if you will, through our shareholder programs and provide capital back to our shareholders through dividends or share buybacks. And we've been pretty active in both of those categories over the last few years. So we see those 3 components as being refined as we push through the rest of this decade and creating opportunities for us to improve in the market, but also improve in the aggregate as an enterprise.

That's great. And I think that lays out a lot of the foundation for some of the investors, maybe we could just give an example of kind of like for a sample market, whatever one -- maybe the example of like -- I've always thought that market density strategy you've got is a really effective strategy. And so maybe just a sample of -- like the number of hospitals you're in the market, and then the characteristics of the outpatient relationships with physician versus other access points or service centers.

We talk within our company often about where you compete is just as important as how you compete. So we -- like I said earlier, we compete in some great markets. Let's just take Dallas-Fort Worth as an example, which is our largest market. We have the second market share position in that community. We've moved from third to second over the last 5 years or so. And in that particular situation, let me back up in all of our markets, we're either #1 or #2 with the exception of a handful, where we're #3, but we feel like we can produce reasonable returns on capital in those markets. Our formula, Lance is built around creating local scale, local scope of services and integrating the whole network into a system easier to say than do, but that's what we're trying to accomplish. So in Dallas-Fort Worth, as an example, and it's comparable to Houston or Miami or Tampa or Denver going to any of these places. It's the same way. We have 18 hospitals in the DFW area. Different kind of hospitals, some are smaller, some are larger. We tend to have scenario in most communities where we have multiple hospitals. In DFW, we probably have 500 outpatient facilities or clinics that are connected through affiliates, through our own -- wholly owned entities, partner entities and so forth, supporting those 18 hospitals. We try to put wraparound services that can support them. So we have our own transfer like dispatch center for lack of a better term, that helps patients, helps EMS navigate through our system. We have our own ground and air transportation capabilities to support the network. And then we have a lot of physicians. I mean we need physicians to make the system work. Our goal within each of those communities in each of those local systems is to be a one-stop shop. And by that, I mean, we want the patient to have easy access in an outpatient facility to start their process. So we pushed our facilities closer to the patients because these are fast-growing communities, really efficient offerings, better price point, better throughput. But if they need deeper clinical care, we can take care of them somewhere in our hospital systems. So we build out services to where we can offer whatever complex acute service is necessary to take care of those patients. In Dallas-Fort Worth, as an example, we have transplant programs, we have trauma programs. We have really sophisticated children's programs. All of these elements are necessary for us to keep sort of the closed loop. That is not exactly the same from one market or the other, but that's sort of a prototype approach that we would take from -- in sort of building out the local system.

That's great. And actually, when I we'll talk with folks and give examples about you. You actually use Dallas-Fort Worth as an example. I know from -- as an insurance guy, that you would be really interesting because you sort of a must-have in a network. And so you're so comprehensive, so dense in markets that it isn't really easy for an insurance -- on the employer side for example to avoid have an HCA and so at least...

I don't like to say we're must, I'd like to say we're relevant. And I think the relevance produces opportunities for us to participate broadly in payer contracts. And we do participate in just about every contract that's available to our facilities in each of the communities. We've actually improved our overall contract participation in the different areas, Medicare Advantage, commercial exchange and Medicaid over the past 3 to 5 years. And we've lifted ourselves to where we have largely full access to all the population in a community, which is important. I don't think it's must-have. I don't like to use that term. I think we need to be -- we need to earn it and we need to be relevant, and we need to have a system approach. And if we can do that, then it's value to the payer, it's value to the patient, value to the doctor, and then ultimately value to HCA.

Totally makes sense. Before I get into some of the kind of current dynamics that are going on in the market. I know you guys, with your Investor Day, had laid out kind of a long-term framework for EBITDA growth, for EPS growth for the investor community here if you want to just kind of refresh everybody on kind of what that long-term algorithm is for you guys?

Can I ask my CFO to do that?

You bet. Yes.

Mike Marks?

Sure. Yes. If you think about kind of the power base day because the combination of this adjusted EBITDA growth, the 4% to 6% -- that 4% to 6% growth in adjusted EBITDA comes from 2% to 3% growth annually in equivalent admissions, and 2% to 3% annually in net revenue per equivalent admission to volume and rates. So that sets that top line at 4% to 6%. We've been able to maintain our margins over the years. And with that margin maintenance, it gives us the ability to grow EBITDA 4% to 6%. So you take that power of the network that Sam just talked about, and you combine it with our capital allocation. And with our investments back in our facilities with our payment of a modest dividend, and then we use our free cash flow at the end to do share repurchase, which then allows us to turn that 4% to 6% growth in adjusted EBITDA into an 8% to 12% growth in EPS. And you've seen that the power of the stock over the last decade. And that's really the formula we talked about at Investor Day.

That's perfect. I think great framing for the audience. Let me turn to some of the questions on side of the current environment, and then start to walk through value proposition and longer-term trends and opportunities. So you've had tremendous recovery in volumes over the last couple of years about now. How are things looking thus far in the year and as we're kind of moving into the second quarter, any changes? And what's sort of the outlook for you guys for volumes this year?

Well, we started seeing solid demand for our business, actually in '22, and it really accelerated a little bit in the last half of '23. That's carried itself into the first part of 2024, so our first quarter results were really strong from a volume standpoint. We actually guided at the beginning of the year slightly above what Mike just talked about on volume for '24 simply because we felt the momentum that we saw in the marketplace and in our business at the end of last year would continue into 2024. So we set our volume expectations at around 3% to 4%. Clearly, the first quarter was above that, and so just doing some simple math would suggest that we're going to be at the top side of that guidance. And that's pretty much where we think we will be. I think the second half of the year, the comparisons get a little bit more difficult, but we're anticipating strong volumes as we push through the rest of this year. And at our Investor Day, we talked about what we saw as strong demand for health care over, we'll call it, the intermediate run to the long run. And for us, a population growth, aging baby boomers still drive demand, you have chronic conditions in communities, and that all lifts demand for health care. So we expect our long-term forecast for demand on the inpatient side to be 1.5% to 2%. And then on the outpatient 2% to 3%. So it's in line with what Mike was alluding to. And if we can continue to gain market share, which we have a goal to improve our market share, then really creates a solid opportunity for us to achieve and maybe even exceed some of the expectations that we put forth. There's no reason to us to get ahead of what we see today just because there's things that happen in health care. It's hard for us to judge is there really pent-up demand from COVID? I find that hard to process that people would sit on the sidelines for almost 3 years that they heard. I'm not sure why they would do that just because of a pandemic. But there may have been an element of that, but I think in '23, no, that wasn't an element. In the first part of '24, no, there's just a lift in activity that I think is a result of more coverage for people. I think there's a lift in activity because there's more confidence in generally -- in general. And I think we're growing market share a little bit, and that's why we're seeing some of these volumes.

Yes. It makes a ton of sense. One of the things we've spent a lot of time over the last couple of years looking at is on the supplier capacity side and labor supply and trends there. And we've thought those have been really favorable for you and for the industry. Could you talk just a little bit -- a compensation expense is one of the ways it represents itself, and also just your capacity to be able to continue to expand the labor force to expand volume. So what's going on sort of from accessing labor, cost to labor perspective for you?

Well -- just let me give you a metric, [ run off the bat ]. We were struggling with, I'll call it, labor supply in 2022 and in parts of 2023, we were having to turn away patients through our system that I just talked about because we just didn't have the labor to open up, beds are provide the appropriate coverage to the patients. And so we had to turn away those patients and get them into somebody else's system, unfortunately. We have improved that significantly over the last 9 months. And our ability to receive patients because of sufficient supply of nurses and other caregivers has increased. So the market as a whole has normalized a little bit. Compensation trends are down from where they were in '21 and '22. Some of that is due to a better mix of premium labor and employed labor. So that's helped. Some of it is due to the fact that there were a lot of compensation adjustments that we had to make to get competitive in the market. Those have started to normalize a little bit. So we think our view on inflation on wages right now, somewhere around 3%. And that considers the compensation adjustments we need to make for purposes of being competitive, inflation and then also a little bit of the -- I'll call it, the arbitrage with getting the right mix of labor into our equation. But in the longer term, our workforce development is geared towards sourcing and developing a pipeline of nurses, and that's where our Galen College of Nursing program and some of our other educational programs, plans really create a differentiated opportunity for us. We have an opportunity with Galen to create a totally different nurse student experience and marrying up the clinical aspects that we can provide with the classroom aspects that Galen can provide, putting metrics around that, putting different kind of integration around that, hopefully creating a better student experience for the Galen competitiveness. Creating a better nurse on the way out and then hopefully retaining them in the HCA system, so we can pipeline talent. We will have 30,000 students in our programs in 2027, graduating 7,000 to 8,000 students 1 year. And if we do our integration correctly, which I'm confident we will, then that becomes an interesting pipeline for us to create capacity to manage the mix of our labor effectively and really change the paradigm. So we're pretty excited about that.

That's fascinating. And again, it seems like really differentiated with the ability to access labor in a different way than your competitors. Before I get to some other aspects of things that are going on right now. One of the other things that was really intriguing to us over the last couple of years for you guys was at -- in like 2022, you were hit with wage inflation and some of the premium labor and whatnot, but the nature of the hospital contracts as such that it wasn't immediately passed along. And so like our view has been, well, it's going to get passed along. It's an industry issue. That's something that like managed care idea is going to have to deal with, obviously, government will deal with in whichever way it does. How are rate -- what's the rate environment like for '24 that you're experiencing now? And what's the outlook for that as you move forward.

So let's just say, pre-2022, our trends on pricing on the commercial book of business was 3% to 3.5%. So it's slightly above inflation, but at a more moderate level. Once we started to see the wage inflation and now, we've seen some physician pro fee inflation, we have lifted our target on price escalation within our commercial book to the mid-single digits. So we accomplished that mostly and in 2024, we're pretty much fully contracted. In 2025, we're maybe halfway through the book. And then in 2026, we're maybe 25% to 30% of the way through the book. And we're able to achieve the targets that are necessary to compensate for the 2 inflationary components that we've seen, seen a little bit of inflation in supplies, but it's not nearly as significant. I think you go back to our networks, it's important that we have the relevance and have the system capability to create the value for the payer that's necessary for them to sell to their members. So it's an integrated process for us. I think the second thing I would add is occupancy levels in general, not just in HCA facilities, we're at an all-time high. But in general, within our markets, it's at an elevated level and that creates some microeconomic dynamics within the market that gives us some confidence that we can achieve, appropriate escalators to compensate for inflation. On the government side, it always lags, and it tends to be insufficient. So we have to have other efforts to compensate for that, efficiency efforts, throughput efforts, growth, all those help us compensate for the insufficiency in government reimbursement increases. We have operating leverage, Lance, as a company because of the fixed cost within our hospitals. So our growth agenda becomes part of our pathway forward on mitigating some of the government challenges that come with reimbursement increases on a year-on-year basis, because the contribution margin and the leverage we get on our fixed costs are real. Now they get -- that's assuming -- we don't have a physician cost pressure point. But setting that aside for a moment, there are opportunities for us to leverage our fixed costs and help compensate for some of those insufficiencies.

That's super. Let's talk a little bit about kind of your mindset in a market as you're competing with others. Maybe if you could frame just the level of fragmentation of some of the competitors. And where I'd like to ultimately go with it is as you're looking at being successful in that local market, is it about achieving a better rate than other competitors based on where you're at? Is it about gaining more share in a particular category, like employer that you maybe value more? Like what is it you're trying to accomplish? And maybe as part of that, what's the context of that local market dynamic?

Well, I think health care in general is very fragmented. The hospital systems are less fragmented than the physician community, but we're pretty fragmented. And HCA is the largest health care hospital system in the country. We have 6% of the nation's market share. Within our markets, like I said, we have 27% to 28% market share. Typically, we compete against local systems only. I would say for the most part, our markets are fairly consolidated. You take -- let's just stay on DFW for a moment. The top 3 systems produce roughly 70% market share, and then you have a few stragglers there. In order for us to compete effectively, I mean there's not one thing that differentiates. So it's a lot of details to be perfectly candid. We're a detailed-oriented company. We detail the market. We detail the physicians. We detailed the services, and we really focus on execution. And our strategy for DFW, let's just say, is about the same as the other major systems. Now gets down to who can plan better, who can resource more effectively, and then who can execute on the ground. And that's where I think HCA shines. And that's what gets us to outcomes that I think are industry-leading on multiple dimensions of our business. And so we have to connect with a physician on an individual level. We have to make sure our outpatient facilities are in geographies that are necessary to fill voids if we don't have it or the geography doesn't have it. And then we have to have technology and other capabilities downstream. But at our core, we got to produce a quality outcome. We have to be a good place for people to work. And we have to have the tools that are needed. So we're investing in all of those pieces and parts, and then executing with a disciplined mindset that gets us to the outcomes. I mean it's not a changing the world, but it's changing the world for that patient, if we do it right.

Okay. That's perfect. Thinking about some of the longer-term trends and opportunities here. One of the things that's really intriguing to me, and I think has been a shift in my long-term perspective on your sector has been the opportunities that AI might present with respect to, I'll call it care automation. I don't think that's an acceptable term, but like the steps before that, the things that kind of enhance clinical efficiencies and things like that. I know you guys in addition to probably what you're doing in the business, some of the things you outlined at Investor Day, you've got venture portfolios, you do a lot of innovative things. If you can just talk a little bit about maybe the vision of where that could go from an investor perspective? And then maybe tangibly, what are some of the things that are kind of initial stages of improving that clinical efficiency.

Yes. Well, I'm sure I'm probably the 100th CEO that's come to this conference and said, hey, AI going to make a difference, right? But I'm telling you, yes, it's going to make a difference in our business. And I say that -- I mean, it's going to make a structural difference in our business and in our company, and that's what we're excited about. And we think it's coming together at a time when we're ready for it. I'm not sure we would have been ready for it 5 to 7 years ago. But we've always known that we have another layer of capitalizing and leveraging the scale of HCA, and it starts with our data. We have the largest proprietary database of clinical transactions in the country, maybe not as much as the NHS, but maybe because they're fragmented in their own way. And so we have to tap into that. And we think the machine gives us an opportunity to tap into the patterns that we see year-on-year-on-year with 220,000 deliveries of babies in 2022, in 2023, 2024 we can go back even further and learn, why do we have a great outcome? Why do we not have a not-so-great outcome? What can we learn? What can we infuse into the process of delivering a baby that just improves the scenario for a mom and the child. But we have 3 domains that we're focused on with our artificial intelligence agenda. And the first one is administrative. We have a lot of administrative costs in our company. Our revenue cycle, HR, supply chain, our IT stack, all of that has a lot of administrative functions. And it's going to be easier to get at those than a couple of the other ones. And so we have an effort that includes automation, includes artificial intelligence, machine learning throughout the whole administrative process to help our revenue cycle, help our supply chain, help HR, whatever. So we think we can lower our fixed cost -- or administrative cost per patient as a result of that. So we're investing in those tools early and already seeing signs of some progress in key areas. The second area for us are domain, if you want to call it that is operational. So our facilities operate a little bit independent of us. They have to. They're big businesses. They have a lot of activity, a lot of processes and so forth. So we see ways to use this technology to help us with matching up our staffing to the patient demand even better, managing the throughput of our patients more effectively and helping us with our case management agenda, helping us with capital asset management for lack of a better term. We also see opportunities to help our nurses and some of the administrative functions that they do. So the operational domain is a very exciting domain and one that we think we can get to more easily; and the third domain, which we consider to be the Holy Grail. And that is bringing these learnings, these patterns from our database back to the decision-making that our physicians and nurses have to make on the patients, not supplanting their final decision, but supporting the physician in the process of evaluating the situation that they have to make effectively a clinical strategy around. And if we can bring the learnings from these patterns -- patterns into an obstetrician and help that obstetrician make a better decision with better information and so forth. We think it's really powerful and can help our patients get to a much better outcome. We have a safer environment and so forth. What artificial intelligence will do for us in that domain is we have all this information in the background, in our data sets, in the medical record, and we think we can grab it and bring it to the foreground, where the people who need it in the moment, can then act on it appropriately and maybe a little bit more effectively than they do today.

Super. And as a particular area of interest to us to see how far that could reach and...