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

All right. Let's get started. Good morning, and welcome to the 2024 Jefferies Global Healthcare Conference. I'm Brian Tanquilut, health care services analyst here at Jefferies. And with us today is HCA Healthcare Company CEO, Sam Hazen. And Frank Morgan, the Head of IR is with us today. Sam, Frank, thank you so much. Really appreciate it.

Thank you.

Thank you.

Sam, it's my turn to ask you a question.

Fair enough.

No. So maybe if we can start with kind of the state of the union on HCA and any updates that you want to share with the audience, both here in the room and online.

Yes. Let me just give you sort of what I'll call a short-run analysis, and then I'll give you a sense, Brian, of what we're doing long run because I think that's very relevant to who we are. We had our Investor Day in November, and we talked about, what I call, the unique staying power of HCA and how it's been able to navigate itself through different cycles, different events and really come out on the other side with strength. And so our focus is how do we go from strength to strength as a company. And in the short run, we've been focused on really three areas. One is making sure our people agenda continues to progress. So we've been focused on recruitment, retention, reducing contract labor, really creating an environment for our employees to succeed on a daily basis, and we've had success with that. We've made significant progress as a company since the challenges of 2022, in particular. And so we've seen continued sort of improvement in key metrics related to our people agenda. The second thing in the short run that's been very important to our company is really increasing capacity. Some of that has been through people and adding people, so we could open up beds that were, in fact, closed. But the second aspect of that is really centered around our case management and throughput initiatives. So we have a very significant effort there as well, so that we can get patients into the right environment appropriately and timely that frees up capacity for us to take on new patients who want our services. And so we've seen improvements there. Again, Brian, over the last year, 1.5 years, we've been able to accept more transfers into our system, and we've given metrics around that to you all. And we really are in a situation today where the number of transfers into our system are actually up significantly on a year-over-year basis. We're still turning away a few more patients than we would like, but we've closed the gap significantly on that front. The other area related to case management and throughput that's very important is our emergency room revitalization program, where we've been very intentional about improving our operational processes, the training of our people and some of the technology support that we have in our emergency rooms, so that we could cycle our patients through more timely in a more satisfying experience. And in fact, we've had significant strides there as well. Our time to treat for roughly 10 million emergency room visits in a year is down below 10 minutes. So it's really a remarkable effort by our teams. Our patient satisfaction has improved. In addition to the time to treat, we want to get people home as quickly as we can, and we've made some improvements on that metric as well. And then the other aspect there is if patient does need to be admitted, we get them onto the floors as timely as we can. So case management is the second and throughput management is the second area of focus in the short run that's had success for the company, and we showcased that in the third quarter, the fourth quarter and in the first quarter of 2024. So we've continued to make positive movement there. And then the last area for us in the short run is executing on what we call known winning plays. So we have a lot of, what I call, on-the-ground winning plays that we have as a company. And those involve standing up our outpatient facilities, integrating our network, aligning with physicians, just helping us to sort of win on the ground. Small things, but they add up to a lot as a company. And so those three areas have been the primary areas of focus. But we've come out of the pandemic with more strength and more momentum than we had going into it. I think organizationally, our culture has improved as a company because I think we dealt with our constituents in a very appropriate way. That's helped us. Our competitive positioning, Brian, has improved coming out of the pandemic. We actually gained market share during that period, and it was difficult really to sense what was going on in the market. But as we look at more stable market share metrics, we have grown. And then financially, the company's financial position has improved. Our cash flow production has grown. Our leverage ratios have shrunk, and we've been able to really execute on our capital allocation as a result of that. So we feel like we're in a really good position to execute into our long-run plan, and we can maybe get into that a little bit later.

Sam, I think you answered everything.

Good to see everybody.

Known winning plays. No, that's really good. So maybe, I'll start with volumes. Volumes have been strong across the hospital industry over the last few quarters. And it doesn't seem like it's just post-COVID pent-up demand at this point, right? So how are you thinking about demand dynamics going forward for HCA and the sustainability of healthy volume growth, taking into consideration throughput and care management, as you mentioned?

We're positive on overall health care demand in the long run. We think health care demand in the long run is going to be 1.5% to 2% on the inpatient side, at least in the markets that we serve. We also think on the outpatient side, demand is going to grow anywhere between 2% and 3%. In 2024, Brian, we guided a little bit higher because we sense that the market demand, at least in the short run, was stronger than our long-run horizon with respect to demand. And sure enough, that's played out in the latter part of 2023 and then in the first quarter of 2024. We have a 3% to 4% guide on our volume growth in 2024. Given how strong the first quarter was, it's probable that we're going to be near the high side and possibly even above the high side of our volume guidance in 2024, just because of sort of the forces that exist within the market today as well as the performance of the first quarter. But I think HCA's markets, generally speaking, are better than the national average. We see a lot of population growth. We see strong business growth, very friendly regulatory environment largely, and that's yielding what we believe to be a very good economic environment for us to conduct business. So we're very focused on discipline around our portfolio, not getting into communities that don't have the same type of metrics and investing inside of that embedded growth that we see in Texas, Florida, Tennessee, South Carolina, Utah and Nevada, great places to do business and really sort of a natural lift that's occurring because of the microeconomic factors that exist in those markets.

No. That's awesome. And then, Sam, maybe aside from the strong volume trends that we've seen, HCA and even the other publicly traded hospitals have seen relative strength in rates and acuity as well. So how are you thinking about the sustainability of above average growth in revenue per adjusted admission?

There's three aspects to revenue yield for us as a company, and we're strategic in all three aspects. One aspect is pricing, and we have some influence over aspects of our pricing in the commercial sector. So we have lifted our target range because of inflationary pressures on nurses and now physicians. And so we're in the mid-single digits as far as the target around commercial pricing. And largely, we're getting that. We're pretty much contracted completely for 2024, about halfway contracted for 2025 and about 1/3 contracted for 2026. So that continues to be one component, with progress being made by our teams on a revenue yield. The second component is acuity. Patient cohorts in general in our facilities are more complex than they were in, let's just say, prepandemic levels. And we've grown our acuity, I think, by 5% to 6% since the 2019 levels. And I think some of that is due to the natural migration from inpatient to outpatient. So you have a larger more acute cohort as a result of that. The second aspect of our acuity is our strategic initiatives to grow complexity around programs that we know produce higher revenues per patient and really are part of our network strategy to be comprehensive in the services that we offer, hopefully creating a one-stop shop for a patient if they need more complex and deeper care. So that's the second piece of our revenue composition, Brian, is acuity, and we have seen growth, I think, naturally in that, and then we've seen growth from our strategic initiatives. And then the third thing is payer mix. And for us, payer mix is a very important aspect of our overall revenue mix. And our payer mix has grown and improved because, again, it's a strong job growth, more employer-sponsored health care. The exchanges have grown, and that's yielded a better payer mix. And then the third thing is, again, we have strategies that are geared toward driving market share growth in the commercial segment. So our urgent care platform, our service line development, our freestanding emergency rooms are all geared toward being more competitive in that particular space. And so the composition of pricing, acuity and payer mix efforts, some happening in the market and some happening strategically with our initiatives has yielded a pretty good revenue per adjusted admission result. We don't see any significant changes in that over the next 12 to 24 months. Obviously, there's risk with the additional subsidies that come from the Affordable Care Act sunsetting on that component at the end of 2025. We need to get through the election to understand what the implications might be there and what the political positioning of the industry and even the payer industry needs to be with respect to that. So other than that, we're pretty optimistic about our ability to sustain that.

No, that's great. And then, Sam, shifting gears on the labor front. You guys have done a good job pulling back on the use of temp staff and ramping up recruitment. So where do you think you can take that further? It feels like retention and permanent hiring has done really well, even better than pre-COVID levels.

As I mentioned, we have made really good progress broadly across our people agenda. We still see some opportunities. It's not going to be as easy to get, if you will, as what we've achieved so far, but our belief is that a number of our initiatives should yield incremental improvements over the rest of this year. Longer term, Brian, what I'm really excited about is our workforce development initiatives, generally speaking, and we have a very robust workforce development effort in our company, investing heavily in nurse education with our Galen College of Nursing, where we will get to the point where we have 30 colleges. Each of those colleges will be connected as a front-end component of our provider systems. Some communities, some provider systems in our markets will have two colleges potentially given the size of Dallas-Fort Worth, Houston, Miami, those kind of places. And -- but that's a really important initiative for us to pipeline nurses and really create, hopefully, a better nurse through a more cohesive, didactic classroom experience and clinical experience, produce a better nurse on the way out and then hopefully retain them in the company. Sometime in 2027, I think we'll have 30,000 nursing students in the Galen College of Nursing. We will have 30 colleges across the country, graduating 7,000 to 8,000 students a year. And if we can accomplish our integration of those students into our system, we think it will help us with our labor agenda, help us with our capacity agenda but, more importantly, help us with our quality initiative because we'll be able to hopefully integrate the graduate nurse more effectively into the clinical operations of the company.

Sam, I know the last time we met, we've talked about Valesco and we said we're not going to talk about Valesco again.

I'm not talking about the Valesco.

So maybe I'll take a broader view. We're still hearing distress from some of the non-Valesco operators out there of physician staffing. And I know not every HCA hospital is under Valesco. So how are you thinking about subsidies going forward? And are there reasons whether it's opportunity from your perspective to bring some of these physicians into the fold of Valesco at some point?

We are in the last stage of fully integrating, I will speak about Valesco, into the management of HCA. We had -- it took us a little longer than we had hoped simply because there were some transition services that we needed to stand up before we assimilated this large physician group. And we have recently just fully assimilated that. That is going to give us line of sight on aspects of the hospital-based physician services that we now control in a manner that, I think, can be helpful to us in the long run in -- on many elements. One, clearly, efficiency, capacity, service, growth, all those kind of things, quality. So we're pretty excited about what it represents as an opportunity for us. There's still pressure on hospital-based physicians. It's moderating as far as the rate of growth with respect to pressures. But it's important, I think, to understand, Brian, that we need nurses to open beds. We need anesthesiologists to keep our surgery suites open. We need emergency room physicians to keep our emergency room beds open. So there's an element of supply that we need, and we have chosen in many instances, Valesco being the biggest example of that, to protect the business. And protecting the business, it meant maybe some short-run pressure from Valesco. We think we have a much better handle on hospital-based physicians and the cost pressures there this year than we did last year. But it's fluid. And I don't know if it changes materially, but we're better positioned to address some of those challenges today than we were in previous years.

Sam, maybe shifting gears. One of the things that I always appreciate about your earnings calls is how you give your market share gains at the individual regional level. And you've obviously succeeded there. But as you think about a lot of your key markets, how much market share gain opportunity remains in your mind? And what does it take to keep driving that going forward?

We're north of -- we're almost 28%. We were 23% in 2012. So we've grown 450 basis points. It doesn't sound like a lot. That's a huge move up in our business. We have a target of 30% by 2030. We're about 27.5%, so another 2.5 points of growth. I don't know that, that's the limit necessarily. That's just our targets. We have to execute our strategy to achieve that target, which includes adding outpatient facilities. Today, Brian, we have 2,500 ambulatory facilities in our company. We look at it as if it's an ecosystem around each hospital. So that averages 12 or 13 outpatient facilities for every hospital. We connect each hospital's ecosystem, if you will, into a market system, and then we connect it to the national system. That's what's different about HCA versus a lot of our competitors. And so we will continue to invest heavily in our outpatient platform. It's low capital. It gets in the market a little bit quicker. It tends to sort of extend the reach of our services to where the patients are. And as these communities continue to grow, that's a very important piece. Physician alignment is another piece of growing our market share. We need to be very intentional about building our medical staff and developing capabilities there. And then the third piece would be integrating our networks. We still have opportunities where patients actually start somewhere in our system, and we don't get their business downstream for whatever reason. And there's opportunities for us to use technology to navigate patients a little bit differently and help keep them in our system. So those three pieces, we see potential and as a pathway forward on getting to our target.

Maybe, Sam, shifting gears a little bit here. So one of the things that we've always thought about HCA, you've alluded to it in your first comment, right, is you're in some very strong geographies, Texas, Denver, Nashville, South Florida. You've been land banking. How are you thinking about the development of these new geographies or even the land banking strategy that you're doing in some of these markets?

I just had a meeting actually this week on our land banking, to use your term. We never use that term. But anyway, I appreciate where you're going. We have acquired a lot of property over the last 2 or 3 years for future growth. Some of that property will be used for our outpatient network development, and some of it will be used for hospital -- new hospital development. We are in a situation where our communities are growing. There's a need for us to fill in gaps. Some of it will be, like I said, with certain outpatient facilities, but some of it will be with new hospitals. We're actually opening a new hospital in San Antonio this year. It's the second one in San Antonio. We've opened one last year. We will open one in Gainesville, Florida. I think late next year, we have land in Las Vegas, Utah, number of parcels in DFW, a number of parcels in Austin and Houston and other parts of Florida that are really necessary for us to push into the growth and round out our network development. The timing of those isn't necessarily clear at this point, Brian. It's not easy to stand up a new hospital, very labor-intensive, working capital intensive, physician intensive and so forth. But there are points in time where it's important for us to go ahead and get those beachheads established in our network, and we'll continue to evolve that over the next 2 to 4 years and I think add 1 or 2 hospitals a year. We're investing heavily back in our existing platform. As you know, this year, we will invest close to $5.2 billion to $5.3 billion, the largest amount of capital infusion back into the business, really centered around outpatient investments, which are not the largest part of that component or that overall budget, but also building out hospital capacity on our existing assets. And that's a very efficient, high confidence return prospect for us when we're able to put capital on top of an existing enterprise, the operating leverage we get on the incremental revenue that comes from that is strong and gives us a better pathway toward a return. Whereas a new hospital is a little harder to achieve at least in a short run time line.

Sam, one of the things that you've -- that differentiates HCA in my mind is your ability and willingness to spend money on CapEx. You're definitely spending above -- a decent bit above the industry average. So given those comments that you just made, how are you thinking about capital deployment going forward and splitting that between returning capital to shareholders and continuing to invest in the business?

Well, as I mentioned in my opening comments, Brian, our financial position has improved. Our cash flow production as a company has strengthened. I think we'll push somewhere around $10 billion of cash flow from operations this year. And for the most part, we have invested about half of our cash flow from operations back into our business for maintenance capital, growth capital, technology and so forth. The other half we've given back to our shareholders in the form mainly of share buybacks, but also a portion of which is related to some dividends. I think that formula will generally be consistent as we push ahead. There could be reasons to elevate our capital spending in a particular year or 2 simply because the growth dynamics in the market may warrant that. But we have a lot of optionality with our capital production that we produce inside of our company, and we're thoughtful and very disciplined around how we do that. And I think it's been productive for our company. If we finish this year as we expect, we will have acquired roughly $25 billion worth of stock over the last 4 years as a result of the strong cash flow that our teams produce. And at the same time, we will have invested, I don't know, close to the same amount in our business to increase capacity and network development. So a pretty exciting agenda. I am excited about our tech agenda, which will require a little bit of capital and operating expense over the next few years. We think with evolving technologies that we have an opportunity to use digital solutions in our business today that -- or more in the future, rather, that will change some of the processes that we have today, Brian. That's going to create, we think, a much better environment for physicians and nurses to deliver high-quality care. So we think patient safety and overall quality can improve as a result of this. And then we believe we can get more efficient and even better at managing our business as a result of greater insights. We have an incredible proprietary database, probably the largest database of health care clinical transactions on people in the country, for sure, but maybe even in the world because the U.K. doesn't amalgamate everything as they could. And that creates a real opportunity for us to learn more from the patterns that we see, the patterns that we see on moms and babies when we deliver 225,000 babies a year, or the patterns that we see on total joints when we do 200,000 total joints a year. We're not learning from those patterns as well as we can. And I think -- and I know it's another CEO with happy talk around artificial intelligence. But I am telling you, it's a game changer for what our business is. And if we use it right, we think administratively, we can reduce our costs and get better on the administrative aspects of our business, operationally with case management and throughput. The holy grail though is on the clinical side. And if we can bring these insights and get them in front of our physicians, support our nurses, and we've got pathways now that we think are going to be open to us to do that, we won't do it overnight. Some areas, we can. But this is a tremendously exciting agenda for us as a management team because we can improve on our patient outcomes and really get to achieving our mission at a higher level because we're leveraging the last real opportunity of scale in our company, and that is to use this incredible database to narrow the variation that exists in health care inside of our company and help support better outcomes across just about every dimension of our business.

Now Sam, it's awesome. We'll leave it on that AI thought. Guys, thank you so much. Thank you, Sam. Frank, thank you.