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

Alright. So good afternoon, everyone. I'm Steve Baxter, the health care services analyst here at Wells Fargo. We're very pleased to have HCA with us today. So HCA is one of, if not the largest operators of health systems in the country from the company. We're pleased to be joined by CFO, Michael Marks. Thanks again for being here. Any opening remarks you'd like to make or ready to just kind of get right into it.

Just dive in.

Okay. Great. Well, yes, maybe we'll start on the demand environment potentially before we move into maybe some of the EBITDA performance in the year, and then maybe of policy topics, too. But just thinking about demand trends that we've seen so far throughout the year. Obviously, there's going to be some natural level of variability in your business. I think people have gotten accustomed to that over time. But I think one thing that definitely stood out across the group was maybe a little bit slower volume growth that we saw in the second quarter. You called out Medicare and Medicaid in particular as maybe being a little bit weaker than you might have thought going into the year. I guess can you just expand a little bit on the volume trends that you saw kind of moving from Q1 to Q2 and how to think about some of the key moving parts there?

Sure. So as we started the year, as you recall, we thought 3% to 4% would have been kind of the volume growth that we expected for the year. We have finished the first 6 months at 2.3% equivalent admission growth. So we're a little bit short of our original guidance. I really break that into 3 components. From a payer perspective, and then we can kind of end with a bit of demand overall. But the first really was Medicaid. And so Medicaid, we're down 1.2% through June year-to-date to prior year. We had originally thought that would be at least flat, if not even up a little bit. And that's really around timing coming off of the Medicaid redetermination process in '24. And we just -- we have not seen the pull-through that we thought. And so it's a little bit short when you think about -- that's about 17% of our volume, we're off about a point. So it's a piece of the story. The other one that's interesting is uninsured volume. I mean our self-pay volume is only up 1.5% year-to-date. It was less than that in the second quarter. We typically think of our uninsured or self-pay volumes tracking with overall volume growth. So we would have thought that would be in the 3% to 4% range, it's half of that. And so that's -- Medicaid itself combined a big chunk of why we're short. And those are our 2 lowest reimbursement payers, right? So that speaks to while we still produced a 6.4% top line growth in the quarter, which is strong. The third one you mentioned is Medicare. And coming into the year, especially after 2024, we would have put Medicare in the 3.5% to 4% range. We're coming in at 3%. So it's just a little bit lower than our original estimates. The only thing I might say and then overall, if you put that 2.3% growth in context, remember that last year was strong. I mean, it's a tougher prior year comparison and then there's also a 50 basis point leap year impact, leap year last year and not this year. So when I kind of boil that into a summary thought. I mean it feels like we're kind of in the range of our long-term plan of 2 to 3. And when you take the prior year comparison into account, maybe even the middle to upper range of that. And so that's how it's looking as we start the year.

Okay. And I think one of the things you discussed that I didn't fully appreciate was the impact, I guess, of the exchange growth that you saw last year, I guess, on the comparison. The comparison got a lot harder, I think, as you've got to the second quarter of this year. Is that the right way to think about it when I look at the first quarter versus the second quarter of this year?

It's really interesting. Now I always like to put in context. I mean, last year had a big enrollment growth in the exchanges. In our states, the enrollment growth was almost 40% plus. And so there was a robust volume growth in 2024 coming from that exchange enrollment. But when we went from first quarter of '24 to second quarter of '24, we saw almost a 15% increase in the exchange volume sequentially. This year as we went from first quarter to second quarter, we had a 3% growth sequentially. So some of that also is just the difference in enrollment this year in '25, our enrollment growth in our states was more like 13%. So it's -- our growth year-to-date to prior year in exchanges at 15% is still good. I mean it's still healthy growth, but not nearly as good as it was last year.

Yes, Okay. And then if we were to look at and remove maybe the exchange contribution to volumes in the past couple of years, as we contrast maybe where things are for the commercial ex exchange book? I guess how are trends there in the first half of this year? And I guess, maybe help us think about what that looks like compared to the past couple of years.

Sure. When I think of our commercial book, excluding the exchanges through the first 6 months, we were up just short of a point. And in a normal year, if you go back over the last several years, you would say 1% to 2% growth on employee-sponsored insurance kind of the commercial book broadly excluding exchanges would be a normal level. So the way I contrast it, and I'm just going to stick with kind of June year-to-date. We're up, call it, 4%, 4.5% on total commercial book, including exchanges. And the exchange volume was maybe a little better than we anticipated and the commercial may be a little bit lower than we originally anticipated. But not terrible. I mean just short of a point, not way off our trends. And a 1% to 2% growth over time fits within our long-term plan 2% to 3%.

Okay. Perfect. And then just thinking about the range of guidance that you have, it seems you stay at the second quarter level maybe tracking closer to the low end, if you see more like the first half performance, maybe tracking in the midpoint, if you get some improvement you can be kind of skewing towards the high end. Is that the right way to think about it? I guess like how do you think about the comps in the back half of the year as well?

Yes. And it's -- there's a lot of moving parts in 2025 for the company. Let me mention a couple of them, and then we'll conclude with how I think about the second half of the year versus the first half. But keep in mind that when we raised guidance, we raised guidance $300 million at the midpoint of our guidance range. About $150 million of that was from the state supplement payments. From a timing perspective, though, the way to think about this is we had $180 million net benefit in the first half of the year. In the second half of the year, including the new Tennessee program, we're expecting about a $130 million decline in state supplemental payments. So that is a little bit of the difference between first half and second half. And then the second thing would be the hurricane markets and kind of the overall portfolio. And so the hurricane markets, we think now as part of that $300 million raise, they're going to be $100 million better. You will see that, though, kind of be a bit negative in third quarter with that pickup pretty much happening in fourth quarter based on the timing of the hits in 2024 with hurricanes. So there's a lot of moving parts in there. When you take all those into consideration and you look at the midpoint of our guidance, I think the implied growth rate in the second half of the year is pretty consistent with the first half of the year. When you consider the timing of state supplemental payments, the timing of the recovery on Medicaid and the like. So that's how we view it.

Okay. Got it. So yes, so that makes sense. And granted there are a lot of moving parts. And I guess if we were to kind of strip it back and think about maybe removing some of the, I don't know, maybe the less core items of the hurricane markets and some of the incremental Medicaid dollars that you're receiving this year. I guess the EBITDA guidance is up around like $50 million by net all the kind of the moving parts out. I guess how would you characterize the first half of the year in the core performance and what's driving the upside even given the fact that volumes are maybe a little bit softer.

Yes. The only thing I would note on the $150 million increase to guidance is kind of in our operations portfolio. $100 million better on the hurricane markets. We have a couple of markets that are performing below our expectations. It's about $50 million. And then the rest of our markets are performing better than our original expectations. So it's the net of those 3 items that kind of net to that $150 million improvement to guidance. When I think about broadly this year, our volumes are a little bit lower than we thought they would be. But the payer mix and kind of the consistency of our acuity and the like, our net revenue growth has been good. And so we think that's a good marker. And it's in part of why we were comfortable raising our guidance around our portfolio. And then on the cost side, if you just look at our performance through the first 6 months. And what we're seeing in labor and supplies and our operating expenses, we feel like we've got momentum as we go into the second half of the year. And again, it was a part of what drove us to increase the guidance for the full year.

Okay. Yes. And then maybe on the cost side, you could just expand a little bit on what you're seeing, I guess, for labor. I mean it feels like -- the data is a little bit harder to track, but looking at things like quit rates, for example, in the health care industry, it looks like those are kind of continuing to decline, which could have some favorable leading indicators for where labor is going? Do you feel like you're seeing that translate through to your wage trends?

When I look at labor through the first 6 months, we're in a pretty stable operating environment, for -- and I think you're seeing that. Our wage inflation is coming in exactly where we thought it would or really close. We're continuing to see improvement in our use of premium labor. I mean contract labor now is down to 4.3% of total SWB. You go back to pre-pandemic levels, that was at 4.1%. So we're getting pretty close to where we were in a pre-pandemic level. Our retention of staff of hospital and clinical staff is really good. It's basically back to pre-pandemic levels, which is great. And all the work we've done with workforce development, you think about the Galen School of Nursing, you think about all the work we've done with the other nursing schools in our graduate medical education programs for doctors, those investments have paid off. And so I do believe we're in a bit of a stable operating environment of labor. And I think you're seeing that in our financial statements. And it's a result of a lot of work from our management teams. So that's number one. The one component of labor, and I'm going to call it labor broadly is physician cost. And so professional fees, which is contracted labor, mostly on the hospital-based physician side, continue to run a little higher. We're at about 10% same-facility profit growth in second quarter, which is more than double the rate of kind of normal inflation. And it's kind of interesting. That's a hotspot for us, but it's better than it was in '24, and it's better than it was in '23. So all the work we've been doing, I'll call out Valesco as an example to stabilize that segment of our business has paid dividends. But it's still under pressure at 10% growth. We're seeing that now more in anesthesia and radiology and a little bit less in ER in hospitals, which is good. But we've still got to work through that. There's still challenges there that we're working through on that segment of our business.

Okay. Any early thoughts on how that could you think that persistent these pressures? Or like do you think that's realistic they could go back to 5% or the pre-COVID norms over the next few years? Like how do you think about the realistic path forward here?

I think -- so think about it in terms of bad segment. I think we're -- we've made a lot of progress in the emergency room within hospitals. And that investment we made to in-source Valesco and really invest in that has paid dividends to that end. We've got work left to do in anesthesia and radiology. So I'm not quite ready to give '26 guidance and won't do that. But I don't think we're ready to say that you'll see pro fees go back to normal levels in the next year or so for sure. We've got -- that is the one segment of our cost structure that's still -- that we're still working through. But we're working hard at it. I mean our operating teams, our clinical services group, colleagues we have a massive focus to stabilize that workforce. And I think those efforts will continue to pay dividends, but we're not through it yet.

Okay. And then just to talk a little bit on the policy side of things. I guess the most seemingly front and center issue is the enhanced exchange subsidies. Obviously, the industry continues to have optimism that at least in some form or fashion, they can potentially get extended. So to the extent there's any kind of update on the company's messages maybe resonating with policymakers, we'd, of course, be interested to hear about that. But I guess just at this point in time, like we are getting somewhat closer to the end of the year at some point, you might be in a position where you need to provide guidance that factors in some kind of assumption around exchanges. Do you feel like you are close to knowing what you would need to know to develop that kind of estimate? I guess where do you stand in terms of the level of uncertainty here?

Well, I think we're going to have to see what happens with EPTCs. And do they get extended or do they expire? You noted this, but I am encouraged. There is some momentum in terms of a growing understanding of the importance of EPTCs to these 24 million enrollees across America. A lot of these enrollees are in non-expansion states. They're in a lot of these are in Republican states. And so these folks, the impact of EPTCs don't get extended or real and I think the legislators, the President, the administration, I think, appreciate that this is something that has to be considered. Now I don't know if they're going to get extended or not. And we'll see here over the next several months what happens. But before we are going to be ready to size it specifically, we're going to want to get a little bit more understanding of what happens with EPTC. You could anticipate that on our fourth quarter call when we give 2026 guidance that we will give you our best thinking on what EPTCs, what's going to happen, we believe, and what the impact will be. And also, what our resiliency plans are and how much of those should they expire, how much of that adverse impact we could offset to our resiliency efforts. So we've got to get through third and fourth quarter here. We got to see what happens within Congress. And then on our fourth quarter call would be when I would expect you'll get more information.

Okay. We'll be patient. And then just as we think about just trying to better understand the way that exchange patients interact with your health system. I guess what's the best characterization of how they use the system? Are they potentially like using more emergency care than potentially your average employer base utilization? Are they using fewer elective procedures? Like how are they using your system? And how do we just think about their relative, I guess, performance or sort of volume contribution versus maybe someone who sit in the employer bucket?

Well, let me start just as a note. The health care exchanges are about 8% of our volume and about 10% of our revenue. And when I think about how they perform and how that population kind of engages with hospitals and health systems, it's a little bit between commercial and Medicaid. They are not exactly like the commercial population. They do use the ER a little higher. Their utilization of elective care and the like is a little bit lower, but they're not nearly like the Medicaid population. Right? So they're closer to the commercial population with just a little bit more ER utilization would be how I think about that. So it's not exact, but the other thing I would say from a reimbursement standpoint is that health care exchange is our second best payer. They're between commercial and Medicare and closer to commercial. And so when you just think about the contribution to HCA, think about it in that across that spectrum.

Okay. That's great. Through the first half, there's no intra-quarter update that's given.

We do not give intra-quarter updates.

Okay. So clearly clarified in the case. As we think about Medicaid supplemental payments, the other sort of key policy issue, I guess, First, we've -- good to see that a couple of the outstanding ones we've been waiting for, for some time like Tennessee, we've gotten clarity what's happening there. Obviously, there's been a lot more recent focus on trying to figure out whether maybe previously submitted applications are going to kind of get across the finish line and maybe go into the baseline before some of the grandfathering provisions kick in here. What's the company's latest thinking on where you are in Medicaid supplemental payments and whether it's realistic to think that there potentially could be more here before we have to start thinking about things that are out further in 2028 and the provisions in OBBI.

So the one Big Beautiful Bill Act included some grandfathering provisions, including good faith efforts many of our states, several of our states have applications on file that are being reviewed consistent with that language. We were encouraged just in the last few days that Texas got approved and that's encouraging. It's a good sign that CMS is reviewing these applications, and it seems to be in pretty normal order here under the grandfathering rule. So that was a good sign. We were encouraged by that. There are several other states that we're aware of their applications are also being reviewed. And so a little -- I don't like to predict the future. And so they're not approved until they're approved, but it's encouraging is what I would say. The one that we mentioned before that I'll mention is Florida, which would be the largest one that we're tracking. And we believe it is under review. So that's a good sign.

Okay. Good to hear. And then should we just think about, obviously, the resiliency efforts that you talked about in response to any kind of potential headwinds either from the exchanges or maybe down the road as we think about maybe like Medicaid a few years out. I guess, what are the key sources of potential value there? And I guess how flexible is the company's sort of ability to kind of pull and push those things out according to where the headwinds might sit in a time line.

So when I think about our resiliency program, I really break it into 4 main themes or kind of domains of work. I mean the first one is around revenue integrity and really fighting through the denials and underpayments and trying to do our very best to collect our revenue for the services we provide under the contracts we signed. So that is 1 of our 4 main areas of work is to try to do as much as we can to fight through the denial of trends. Second would be asset utilization. And it's really important. I mean, the hospitals are capital-intensive enterprise. And so things like improving our inpatient length of stay, ER throughput, emergency room throughput, operating room throughput is critically important from an asset turn standpoint. And it's -- we have a serious set of initiatives in our resiliency plan to improve our throughput, including our length of stay on the inpatient side. The third is all about variable costs. So if you think about labor, supplies and some of our operating costs, are variable. And we have a very robust stream of initiatives that over the last 12 to 18 months, we've both accelerated and enhanced, including trying to identify new items here over the last year or so. And so those actions are identified and the work going on to implement and get those into our processes. And really, the fourth one is fixed cost. So when I think about our corporate, our SG&A costs, our operating platforms like our shared service platforms, a lot of work over the last year to identify opportunities to get more efficient and to push those. And so we have a robust plan. And again, on a fourth quarter call, we'll give more insight into what we think the savings from those initiatives could be to help deal with the potential impacts, especially if EPTCs don't get extended. When I think about what drives those plans, I really kind of think of it in 3 ways. The first one is our benchmarking efforts, and we have robust benchmarking efforts both externally to other Fortune 100 companies and at the hospital level, helping our hospitals benchmark against each other. And we're finding great value in benchmarking identifying best practices and helping hospitals and our shared services really advance their performance. The second is digital. And we have a lot of work in flight with AI, with machine learning with automation that we think are really a big part of our resilience yet. And so those efforts are going well. And you'll see the digital transformation being part of what drives our resiliency effort. And the third is our shared service platforms, which are well established to mature, but we are adding additional functions to our shared service platforms to get scale to a broader part of our operating environment and those expansions into other components of our business continue to go well as well. So I feel good about where we sit here today in our resiliency plan, and again, more insights to come as we get a little closer to the fourth quarter call.

Yes. And maybe just to touch on some of the revenue cycle, items, a very interesting topic at the moment. Can you talk about what you're seeing there? And then obviously, adoption of some of these advanced technologies, I'm sure or are helping either that business to become more efficient or improve the yields. I guess, how are you seeing that translate to the business today? Is it resulting in fewer net denials at the end of the day? Like what results do you think you're getting out of those technologies now?

Well, it's really the combination of investment in people, investment in process improvement and technologies. And on the technology side, it's AI, but it's also just automation and software development to just become more effective and more efficient in our work. I would really kind of break it into 2 or 3 components. The first one is really using technology and processes and investments in people to do a better job in adjudicating claims and reducing the impact of denials and underpayments on the business. We've been working on this for the last couple of years. We've been talking about this on our calls. And I think the results of that work have been allowing us to process denials more effectively and when a denial comes in, making sure that we understand the root causes of the denials and that we organize our effort to ensure that we're appealing those. And if we have to, that we're taking those all the way through dispute resolution. If we think these are accounts that were actually owed the money for. And the results of that work have really helped us deal with the growth in the denial trend that you've seen over the last several years, including this year. And so because of that, as we sit here today in the first half of the year, denial trends from the payers have not have been a negative impact on HCA. But I say that because of our response versus I have not seen kind of a reduction in the activity levels as much as I think our efforts to make sure that we get paid appropriately for the services we render under the contracts we signed and doing a better job of pointing technology, people and process against that have paid dividend. And I think there's a lot of opportunity in the future. I would also say, if you think about the payers, we have an opportunity to work together with payers to make this set of processes more digital, more integrated, simplify the administrative processes, help get them the data they need and the like. And so like this is not just kind of us versus them. This is making sure that we are processing claims as well as we can and make sure we get the output that we think we're owed.

Yes, maybe both sides don't need to spend as much money as they do doing this at this day...

. That's right, there's opportunity here. The other areas that I'm seeing that I think have some real potential here would be the use of ambient AI technologies to help doctors document. And I think you're seeing on the outpatient side. So I'm talking about physician clinics now. So think about ambulatory -- you're seeing us and others start to pilot and roll out Ambient AI technologies. And what this does is AI listens into the conversation between a doctor and a patient and it helps that doctor produce a more timely and more complete and more accurate documentation, which I think is -- and based on our audits of our pilots we've done, produce more complete, more timely and more accurate documentation, which we view as being good for patients and good for doctors and good for the system overall. We are starting to pilot that on the inpatient side, but very little. It's pretty nascent, and we have a handful of doctors that are piloting ambient as hospitals, but it's pretty early days on that. So I think documentation and helping doctors get more timely and more complete and more accurate is a good thing. And it's an area where I think AI can play a big role in the future.

Okay. No, that's great. It kind of feeds into maybe negotiating on the commercial payer side, I mean, obviously, your position is you're collecting what you're owed and what's in your contracts, which is good. They are probably seeing it as costs that are really incremental to what they were initially thinking as part of their planning process as it puts them in a little bit of a more difficult situation. Do you feel like any of that is coming into the rate negotiations you're having? I guess, how would you characterize the rate negotiations now versus where maybe they've been in a couple of years post-COVID when you were dealing with getting some of the compensation back for the excess labor that the industry saw.

Yes, we're still -- those are 2- to 3-year contracts, as you know. So there's a bit of renewal cycle that we're going through and we're contracted for '25. We're over 80% contracted for 2026, and we're, call it, 1/3 contracted for '27 on the commercial side. And largely the same rates for Medicare and Medicaid and the like. So I would characterize our renewal cycle is going well. We tend to have long-term relationships with payers. We tend to work through these struggles as the best we can, and we try to help them and we try to get through these in good order. And so I think just the evidence of where we are in our contracting cycle, we feel good about in terms of getting through the negotiations in a reasonable way. We're still kind of largely at our targeted level of reimbursement rate increases as we've gone through this. But there's -- it's always -- it's a challenging piece of work for them and for us. But I'm comfortable with where we are and we try to make sure that in our work with payers that we're finding ways to help each other. Some of that is administrative simplification. Some of that is being cognizant of where they are with Medicare and with Medicaid and the like. And so -- but generally speaking, I feel pretty comfortable with where we are. I would also say that if you think about our model, we tend to be contracted, like we want to be contracted across as many products as we can. And our access to lives and the percent completion around our contracts in our marketplace is as good as it's ever been. So it's a good sign overall of where we are with our payer partners.

And just on the Medicare side, we've seen the inpatient and outpatient proposed rates. Any kind of areas of, I guess, concern or appreciation in the rates like anything [indiscernible] you that was maybe unexpected about them.

Well, I mean, we were disappointed with the OPPS rule. I think their proposal on both the 340B recruitment timing and the inpatient-only list elimination. We don't like, as you can imagine. And so we are advocating the CMS reconsider those as they go from proposed to final, and I hope that they would do that. On the other side, the inpatient IPPS rule has come out a bit favorable for HCA and it's actually a bit elevated from our recent trend. And so given that 70% of our Medicare revenues are inpatient versus outpatient. I think for 2026, the rate update is in line, if not even a little better than our recent trends in total. So inpatient is a little better than outpatient. But in total, I think the update is in line with our recent trends.

And then maybe just spend a little bit of time on capital and capital deployment. I guess how do you think about the potential that there could potentially be more M&A or more hospital assets to look at over the next several years? I know at one point, this was a more important part of the company's strategy. You've always been very selective about it, but the company doesn't -- hasn't added a new market, I think, in quite some time now. How do you think about the potential to maybe do more M&A over the next 3 to 5 years than you have over the past maybe 3 to 5?

Yes. I mean I think it's interesting when I think about the company and our capital allocation approach broadly over time, over the last several years, you see a spend about 45% to 55% of our capital investing capital back into our markets to drive organic growth. And we really like our 43 markets. We believe that there is still a very robust pipeline of opportunities to invest in our organic markets, our core markets. That is really the key to our overall growth strategy. There's good demand in our markets. And so these investments will really allow us to do 2 things. Number one is to capture the demand growth that we're seeing and then number two, to take market share over time. And so that's still the core of how we think about our long-term growth strategy and the like. The second thing is M&A, and we've done M&A over the years, we've already bought 2 acute care hospitals this year. We're pretty active on the outpatient side with M&A. They tend to be lower dollar transactions just because of the size and scale. But -- we've acquired a number of urgent care systems, a number of freestanding emergency room businesses, imaging centers and the like. So we're active in terms of network development using M&A, both on inpatient and outpatient. It could increase over time. I mean we're going to have to see what the next 3 to 5 years looks like in the overall environment of hospitals. It may change a bit. But I think you're going to see some consistency for HCA and how we apply our thought process of capital allocation. I mean we pay a reasonable dividend. I think that would clearly will continue. And then we're big believers in the share repurchase program as well. So the balance that we have in that approach towards capital allocation, I think has worked well for the company. I think you'll see some consistency in that.

Makes sense. Obviously, it's got to be sensible and the returns have to be there.

Well, you said this, we try to be very disciplined when we do M&A. And some of the best deals that we've done are the deals that we haven't done. And so it's got to be the right market. It's got to be the right assets, and it's got to fit our profile. And so you'll continue to see that disciplined approach towards M&A that I think we've exhibited over the last several years.

Yes, makes sense. And then you touched on the dividend. And I guess, if you just think about the push and pull of maybe considering maybe even more meaningful dividend versus share repurchase, what's the company's thought process around that?

Well, we've been pretty consistent in our dividend approach. I mean, outside of just the COVID year. We think that the level of our dividend and kind of our approach to the annual increase has made a lot of sense for us. It's in that balance between capital investments, M&A, dividend and share repurchase, I think the balance that you've seen over the past would be a pretty good predictor of the future, right? At this point, and there's always flexibility, and I'm not changing guidance or anything like that. But at this point, we're not contemplating at least for now a material change to our approach on dividends.

Okay. That's great. I think that's probably about all the time we have today. So thanks so much. I appreciate it.

Thank you, good to see you.