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

All right. Well, through the power of technology, happy to have HCA with us. My name is Ryan Langston. I'm the senior analyst at TD. Thanks for coming. 45th Annual TD Healthcare Conference. I'm, as I said, senior analyst covering health care facilities and providers. Happy to have HCA with us. We have Executive Vice President and Chief Financial Officer, Mike Marks; and Vice President of Investor Relations, Frank Morgan. Thanks, guys, for being here with us. Appreciate it.

Good afternoon.

Don't really need an introduction, but I'll give you one anyway. So HCA owns 190 hospitals; 124 ASCs in addition to a multitude of other ambulatory sites of care; ERs; urgent care centers; physician clinics; operate in 20 states and the United Kingdom. So thanks, guys, for being here. Appreciate it.

Thank you.

Mike, I think you took over a little less than a year ago, maybe 10 months or so ago. Maybe give us a minute just to kind of reflect on kind of the last year that since you've taken the helm and maybe kind of walk into 2025 and where you see this year kind of heading?

Sure. So May 1, 2024, it was the date that Bill retired and I took over. Just a reminder for those who may not know, but I've been with the company right at 29 years. So -- and I've worked for Sam and Bill for many, many of those years. So it was -- I had a good introduction to the role as I came into. '24 was a year of really strong health care demand. You saw that in our volume statistics. I think when I reflect back on 2024 and I think about the really strong growth in volume, I think about good rate clearance and margin performance. It was a good year. Even when you consider the benefit from Medicaid supplemental payment programs, when you take into account the hurricane impact in fourth quarter. And frankly, when you take into account the payer settlement from first quarter of '23, the core operations of the company in 2024 were very strong. As we kind of bridge into 2025, really reflective of our guidance. We still believe that health care demand is elevated above our long-term guide. So we have guided volume at 3% to 4%. We believe our net revenue per equivalent admission looks good to us and is in that 2% to 3% zone. We talked, Ryan, on the fourth quarter call about Medicaid supplemental payments and somewhere between flat to maybe a $250 million headwind. Again, a strong margin performance, leading at the midpoint of our guidance to just right at 6% growth in adjusted EBITDA in the prior year. So we see in our markets this continued strength in demand, and we're -- I think we're set up for a good and stable operating year in 2025.

You touched on the adjusted admissions, certainly guided to 3% to 4% above the long term 2% to 3%. That was the same thing in '23. Is there an opportunity maybe for those to be more durable than 2025, not looking for 2016 guidance, but just thinking about what you're seeing in your core markets what we've seen over the last year and maybe how that sort of influences sort of the long-term planning aspect. Of course, long term, 2% to 3%, but really running in that 3% to 4%. So just how do you think about the durability past '25?

And I think '25 will be a really good marker for us to get a sense for whether or not this is a change in trend. Certainly, '24 came in stronger than we had anticipated, and we anticipated based on where we finished 2023, a pretty good year on demand. I think if you think about the factors here that we're paying attention to. One would be these markets that we have the pleasure serving. So 43 markets in 20 states that have above-average population growth and strong economic output. And those strong economies tend to yield better coverage in terms of insurance. And so generally speaking, I think our markets continue to perform well, and that's supportive of not only population growth, but demand for health care services broadly. The second thing I would say is that our strategy of both making capital investments in our market and really building out our networks locally in our health care markets continue to produce good results and allow us to take market share over time. And then the third leg of this when I think about the growth of demand is really coverage. And so there's been a really strong coverage environment in the marketplace if nothing else driven by the Affordable Care Act, exchanges, over the last couple of years. So we're going to -- it's probably still a little early to change our long-term guide at this point. We would leave it at 2% to 3%, but we're watching 2025 carefully, and as we get a sense for '26, we will continue to study it. And if we need to make a long-term guide adjustment, we will. But I think we need a little more data points before we're ready to do that.

One thing recently that's come up is the flu data, right? I think the flu is sort of -- if you look at the CDC trends, quite elevated in many, many years that we've seen. I think Mike, you mentioned on the fourth quarter call respiratory in general, was maybe a point drag on adjusted admissions growth, but it looks like it's just much, much stronger in the first quarter. How do we think about maybe how that would be impacted by the guidance that you have for the full year, not so much the first quarter, per se, but just the full year guidance.

So just a reflection back on fourth quarter of '24. The respiratory season, and we include flu and COVID and RSV and kind of the broad sweep of respiratory illness in our kind of analysis. But then fourth quarter, it was a point of drag year-over-year on admissions and it was 2 points of drag year-over-year on the ER visits. So -- and if you think about the respiratory season, it just started later in '24 than it did in '23. So it didn't really start kicking in until mid to end of December. As I think about 2025, I would note that first quarter of '24 was also a pretty busy flu season, so a respiratory season. So we'll see how it all completes. And obviously, we'll let you know on the first quarter call of any trends there. But I don't think that respiratory will materially move the number when you think full year '25 versus full year '24. It rarely does. If I think about the impact on earnings, maybe in fourth -- we'll go back to fourth quarter, I think everyone is aware, but respiratory volume tends to be lower acuity but it does carry a margin. And so it has a modest impact when the year-over-year volume from respiratory goes down, but it's fairly modest.

Is there any of your markets where maybe you're running higher occupancy where maybe that could actually be a drag if you're just seeing much more elevated flu activity?

You know, it's -- our occupancy level is pretty well across the company are pretty strong. I mean low to mid-single 70s percentage wise on occupancy. The first quarter every year tends to elevate on occupancy level, largely because of respiratory season and the effect of tourism in what we call the snowbirders in Florida is a good example of that as well. So first quarter tends to be a bit of a higher occupancy quarter for us, Ryan. If I think about the company's strategy here over the last several years, it's really helping us deal with these volume surges, and I would call 2 components of our strategy out. The first one is really our capital investments. And we're adding about 500 to 600 inpatient beds a year through our capital program, and that helps us deal with volume and add physical capacity. And then second, our lead to stage and our case management agenda over the last really several years has really helped us reduce our length of stay and free up beds and staff to take on more patients. And so right now, when I look across our markets, we are accommodating our volumes. It's certainly busy as you think about respiratory seasons and the first quarters are generally busier. So I would put it in that frame.

Okay. You mentioned state directed payments. It seems to be everybody's favorite topic to talk about. But we saw last week, obviously, the Republicans come out and say probably not FMAP changes, no per capita caps changes and then actually started to talk about some of the state provider tax funding mechanism. So where do we sit with that today? I know you've given some good public commentary on that. But has anything changed over the past few weeks since you reported guidance? Or just anything in your thoughts now that actually the Republicans are sort of pushing out mechanisms to change Medicaid funding and actually starting to talk about these programs sort of very specifically?

Well, we're watching it as carefully as you guys are. And obviously, we have our -- both our federal and our state advocacy teams on point to continue to talk about this. I think it's always important when we're talking about supplemental payments to connect the dots back to Medicaid. And they are one part of Medicaid. If you think about the historic reimbursement levels of Medicaid, they're really low. And so over the last many years, states working with the CMS and the federal governments have used supplemental payment programs to try to deal with this historic underfunding of Medicaid and allow health systems to generate access for the Medicaid patients in our markets. And it's important to note, even with the enhancements we've seen to supplemental payments over the last several years, when you look at even 2024, when you take into account revenue and the expenses that providers have to incur to participate in supplemental payments, still don't cover the cost of care with Medicaid. And so that's one point of reference. Another point of reference that we always try to mention for context is the importance of Medicaid and supplemental payments to the broad industry, that is hospitals in America. These are essential for not only for HCA, but for the 85% of the hospitals in America that are not for profit in government alone. And so we continue to encourage and advocate that the Medicaid program broadly, including directed payments, continue to get support and are maintained. So we don't know -- we don't have any inside knowledge and I don't think is being talked about here other than to say that in the past that the supplemental payments have been supported by Republicans, by Democrats, in red states and blue states, and we continue to work to ensure that they continue to have that support going forward.

And just to be clear, these changes that they're proposing really would be for 2026 and beyond. The 2025 programmatic dollars, you pretty much already know about approved for the most part, right?

That's right.

Okay. On the enhanced subsidies, if I just look back in my model over the past couple of decades, your margins have been incredibly stable at the EBITDA line, 18%, 19%, 20% in that range. Obviously, your HICS program, you've grown that or it's grown in your states and you've got an increasing amount of revenues from that program. How should investors -- I know you're not putting numbers on it, but how do we think about that impacting potentially the stability of those margins, again, just given the history that 2 decades plus, they've been fairly stable.

Yes. So I think about the last several years, the facilities kind of went through COVID. And I think it's important to note that as we went through COVID, we did have some inflation in things like wages definitely as we went through the COVID pandemic. I think we've noted inflation in our physician costs over the last couple of years. And programs like the health care exchanges and the growth within the exchanges have helped us, maintain our margins as we've continued to deal with those challenges. So our margins have been really steady over the past really decade. We've been in between 19% to 20% EBITDA margins pretty well through that time period. As I think about the future, I think really, we've got to understand the magnitude of the federal health policy changes that may come from the new Congress and the new administration before we can really articulate the impact on margins for '26 or beyond other than to say that, like always, the company has proven in our past that we can navigate challenges and move through challenges and produce good results for our patients, for our colleagues and for our shareholders. And we're gearing up, as you can imagine, and have been really for the better part of the year to ensure that we have a set of resiliency options that will give us the opportunity to deal with the challenges that come. It's a little early to know until we really have a better sense for the size of potential impacts from this new administration and the new Congress for me to size that for you for '26 other than say that we are getting prepared to offset as much of it as we can. And I think we do have a proven track record if you just look at how we navigated COVID, if you look at how we've navigated other challenges, the 2008 financial challenges and the like. I mean, this company has got excellent management. We have really strong operational capabilities, and we're able to operate at scale, and that gives us the ability to really try to navigate challenges when they occur, and we're gearing up in case we have to do that. And in the meantime, as you can imagine, we're advocating heavily to ensure that people understand the impacts to the hospital industry broadly of substantive changes.

To that point, I think 24-plus million people enrolled in the program now. I mean it's a large number of people that would be affected by these changes. We did see some maybe above average, maybe healthy growth in Florida, Texas, Georgia, Tennessee into '25. How does that relate to the '25 guidance? Obviously, there's a range of outcomes, but just sort of a little bit faster growth than maybe we would have otherwise anticipated. How does that affect '25?

Yes. So as we were coming into this enrollment period, we were forecasting somewhere between an 8% and 10% growth in enrollment for health care exchanges broadly across our 20 states. It ended up being more like 13% to 14% enrollment growth across our 20 states. So it came in better than we thought. It's still within the range, though, of our overall 3% to 4% volume growth, but it was slightly better. And just as a reminder, it's 7.5% of our admissions in 2024 and 9% of our revenue. So you just think about that there's a little bit better enrollment growth on about 7.5% of our equivalent admissions. So you would size it in that way.

On the commercial rate cycle, right, through COVID, obviously, we had increased -- staffing costs weren't being properly compensated for that couple of years past that. I think you and most of your competitors have talked about a fairly generous, I'd say, commercial rate sort of underwriting cycle. And I think TheStreet generally views that maybe rolling off into '26 or '27 or at least moderating sort of back down to historical levels. We were on a panel yesterday talking about GLPs and how that's putting pressure on commercial rates that they're charging back to the employers, talk high single digits potentially for several years. So how do you think about maybe those pressures and those plans looking to offset cost potentially on the medical side, maybe on the health system reimbursement side versus the in-market sort of penetration that you have with very high market share?

So let me give you a rundown on the numbers first, and then I'll give you my sense of things. But right now, we're 85% contracted in 2025, 60% contracted in 2026 and about 20% contracted in 2027. And we are achieving our rate targets. So the mid-single-digit rate target was achieved in those contracting cycles. So that will give you a sense of kind of the way I think about '25 and '26 kind of given the high level of our contracts that are already set. Clearly, if you think about a 2- to 3-year contracting cycle for most of our commercial agreements, these cycles take a while to kind of pull through. And so if you think about 2020, to call it 2022-2023 is when we really traverse the wage pressure challenges that you mean our labor environment has stabilized. But then in '23 and '24 and continuing into '25, we've had pretty significant pressure on physician cost. And you've heard us talking about that on the calls. And so those are still bleeding into those environments. And I think like you and the rest of really America, we're trying to get a beat on what the inflation is going to do in the future. And so I don't quite know yet how those will bleed through to '26 and '27, a little early to speculate. But I do think -- we think about these in renewal cycles of 2- to 3-year pushes and if you go back to before the pandemic and before we kind of hit those inflationary periods, we would have been more in the 3% to 4% range in terms of price increases. So maybe that will come forward after we get through this renewal cycle. But I think it really depends on what happens with inflation broadly, and we're going to have to see and then we're going to have to kind of catch up with the cost inflation that we incurred over the last 2 renewal cycles before I see that changing materially.

On labor, I think one thing we don't hear a lot about is Galen, the school of nursing that you have. It seems like, I'd say, sort of a key factor in how you've maybe been able to deal at some level with staffing. But can you give us sort of an update where Galen's at now, maybe the expansion plans, maybe what do you see that becoming over the next couple of years? And remind us how much of your sort of internal staffing are you able to kind of pull from those programs?

So yes, so what a great story for the company and really for the communities we serve. But when we acquired, Galen had 4 campuses. We're up to 26 campuses now in our markets. If you push out to 2028, that will be closer to 30 campuses. We're 22,000, 23,000 students now. And as you kind of push into the future, that will be closer to 30,000 students here over the next few years. It's really one of the key components of our workforce development strategy in the company. In addition to Galen, we also have a very significant outreach to other nursing schools. And we're America's almost largest hirers of new nurses who come in out of nursing school. So this idea of working through our Galen School of Nursing, working with our academic partners and other nursing schools across the company is important, and it's a way to attract new nurses out of college and really is a key stake in our workforce development plan over time, as is just generally recruiting more broadly, including our experienced colleagues. And a really key component of this is retention. If you think about the last 3 or 4 years coming out of the COVID pandemic, we've seen our retention of staff improve dramatically, basically back to pre-pandemic levels. And we've seen our employee engagement scores get back to and even exceed pre-pandemic levels. And so I really applaud the work we're doing broadly with our leadership teams in the field with working hard to retain staff to expand our recruiting capabilities and continue to build out and leverage both Galen as a key aspect of this, but also our other academic partners and our ability to really have the workforce we need to go the distance as a company.

Maybe more broadly on that point, right, during COVID, we saw maybe call it, unprecedented amount of nurses leave the workforce, retire or just leave permanently, and it doesn't seem in large part that they've come back. But your wages and benefits have largely stabilized. I think we've seen that with other competitors and other companies in the marketplace. But where do you think supply versus demand is sort of at the nursing or the clinical level at this point? And even if you want to throw physicians into that in terms of how many we need versus how many really there are to pick from?

It stabilized a bit. I mean, at the height of the pandemic, it was not stable. And you saw the aspect of that really with the really significant growth of travelers and of contract labor that occurred in '21 and '22 as pretty significant dislocation of nursing staff across America. If you go back to the first quarter of '22, almost 10% of our SWB was with contract labor. As you look at -- as you look at fourth quarter, it was down to 4.6%. So you definitely have seen it stabilize. And that stabilization in the use of contract labor really is reflective of the stabilization in the workforce broadly. I think the key thing on the nursing side is this creation of more opportunity for people who want to become nurses to have the opportunity to go to nursing school. And so strategies like Galen that we are pursuing, coupled with strategies that a lot of our states and communities are pursuing to expand the number of nursing spots in school is really important. That's the best way to improve supply. There are a lot of people in America who want to go to nursing school. And it still far exceeds the number of slots that are available in college. And so this is one of the drivers of why we pursue the Galen strategy. It's also important that states and communities also pursue that because you've got to increase supply over time. I will tell you it's better today than it was 3 years ago, and it definitely feels like it has stabilized on the nursing side. On the physician side, it's a little bit more of a mixed bag. I mean I think you've heard HCA talk before about our significant investment in graduate medical education. And we're up to over 5,000 funded residency slots now across our markets for physicians once they graduate medical school to have their training done, and these slots are important. This is another way for workforce development. And we are trying to ensure that we have the right specialties in our complement of our residency programs across our hospitals. And we view these residency programs as a key way that we recruit and retain physicians who are coming through their training programs and coming out to practice in our markets. And so it's another way that HCA is pursuing ensuring that there's a supply of physicians to take care of patients in our 43 markets. So -- but there's no question. If you look at the growth in physician costs over the last 2 or 3 years, especially in certain specialties that there is a shortage. I mean there's just a shortage of anesthesiologists, for example. And there's a shortage of radiologists. And so you can go through and look at certain specialties and you still see shortages. And so we're having to deal with that, both in terms of what you've seen in physician cost growth, but also in terms of the number of residency slots and the number of recruits that we pursue in our marketplace on the physician side.

On capital allocation, I think you lowered the leverage ratio a bit or the target, at least in the fourth quarter. I guess how should we think about that implication, sort of why do it now? Does that have any implication on strategies for share repurchases or obviously building out sort of your outpatient facility footprint? I think you've called out you have 12:1 ratio for every inpatient unit, you have 12 outpatient units, and you want to get that up to maybe 20 over the next decade. So how should we think about capital allocation sort of in the face of that 4Q change?

Well, just to go back to the numbers. So we did a quarter turn change to our leverage target. It was 3x to 4x, and we dropped it to 2.75x to 3.75x. So it's a quarter turn. It's a modest reduction in our leverage target. Just as a note, we finished right at 3x if you look at 2024. So there's a healthy leverage capability there. And we look at -- if you look over the last 5 years, we haven't run over 3.25x in the last 5 years. And so if you look at the margin profile of the company, if you look at the risk profile of the company, you take into account things like the quantum of our debt and the changing political landscape, we felt like this change was warranted and rational. We do not believe that this change will impact our ability to pursue strategic opportunities as we see them in the marketplace. And as we profile it in our '25 guidance, I mean I think you'll see, Ryan, a pretty consistent approach to capital allocation here. And with our ability to generate operating cash flow, it gives us the flexibility to pursue strategic investments as we need to.

On that point, strategy priorities, there's a rather large ambulatory asset potentially on the market right now. Not speaking of that specifically, but just looking at the number of ASCs that you've had, it's been remarkably stable over the past 5 or 6 years. Where does ambulatory fall sort of in that priority list, and then maybe even further? Maybe give us the top couple of priorities in terms of those outpatient locations we've talked about that you see the biggest returns on in your markets?

Well, we think about ambulatory surgery centers as just part of our approach to the marketplace. And so just for those who don't know the company as well, we tend to focus in our 43 markets. And for example, unlike some other companies may pursue, we don't typically own surgery centers or other outpatient facilities outside of our core markets. So we're a market network play company. And so we approach our market and we have typically a series of hospitals in a market. And then we tend to surround those acute care hospitals with a network of outpatient facilities. And that would include ambulatory surgery centers. It would include freestanding emergency rooms, urgent care centers, physician clinics as well. And ASCs kind of just fit within that paradigm. It's a good asset to fit within your network. It offers a price point difference. It gives a good physician alignment tool. Our surgery centers are syndicated with our physicians. It plays that role for us in our markets. When I think about the last 5 years and when I think about kind of a bridge to our long-term goal of continuing to invest in our networks, the biggest growth over the last 5 years were in really 3 components of our network strategy. The first one were physician clinics, the second was urgent care centers that have seen a nice growth over the last 5 years, and the third will be freestanding emergency rooms. And I think you'll see those 3 be the main drivers of growth into the future with this goal of kind of getting to 20:1 over the next decade.

About a minute left. Anything on tariffs? Obviously, we see those were implemented in Canada and Mexico in the last day or 2. Any impact to the business? I'm sure most of your supply contracts are sort of termed out over a year or 2 more, but just anything on tariffs?

So we are 70% contracted at fixed pricing for 2025. So the risks are pretty low in '25. You come in even after the last decade, our HealthTrust Group Purchasing Organization has been working pretty diligently on tariff mitigation strategy really across the company. First is this idea of getting longer-term fixed price contracts, which we've worked hard to secure. The second is sourcing. And over time, we've worked hard to really diversify our sourcing and try to use that as a strategy to minimize our exposure to tariffs. And really, the third is trying to work with the administration to get key health care supplies excluded from tariffs over time. And sometimes that takes a while once tariffs are established to get exclusions where we can. So we're watching this carefully. And I don't think it's -- I know it's not going to be a material impact on '25. We'll be working very closely with our key vendors into '26 and beyond, and this will be something we all have to navigate together depending on how durable these tariffs are, what the rates kind of finalize that and whether or not health care supplies are included or excluded in the tariff calculations. But I think it's something that we will navigate. We navigated them in the first term. And so it will be another area that we have to work on.

Real quick, we're a little bit over time, but you've been in the seat now 10 months. You've been at the company 30-ish years. What are you most proud of?

Well, I love the company, and I'm really proud of the work we do. If you think about HCA, in 2024, we had the pleasure of taking care of 44 million patients across our footprint. And that care and improvement life is our mission, and I'm really proud of being associated with a company that does this work. I will tell you personally, over the last decade, the work that we've done as a company to improve our adoption of technology, really leverage our scale and drive operation excellence, has really paid a lot of dividends. I'm proud to be on a team that has continued to build our strategy out as a company. And I think the proof is in the execution. And so being in the job since May 1 of 2024, I feel like I'm standing on the shoulders of giants here, Ryan. So I'm really proud to be the CFO of this great company and really enjoyed spending time with you today.

Great. Thank you. We'll have to leave it there. Thanks, everybody. Thanks, Frank. Thanks, Mike. Talk soon.