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

Welcome, everyone, to our session with HCA Healthcare. We're very happy to have them participating in our conference again this year. Michael Marks, Executive Vice President and Chief Financial Officer of the company, is with us. Thanks for doing this, Mike.

Great to be here.

Maybe just to start off, a high-level question. We're 10 months into the year. What have been some of the surprises for you? What have been some of the challenges to the extent there's been some?

When I think broadly through the first 10 months of the year, there's a lot going well. I mean the work of the company and our quality and patient safety initiatives continue to perform really well. Our growth initiatives, if you think about the work we're doing to build out our networks, optimize our networks, the allocation of our capital investments into the field continue to produce momentum in our markets. And we're pleased generally with the demand in our markets for health care services and frankly, with our network development and capital investment programs with our competitive positioning. And we're seeing that in market share improvement. So broadly, the work of the company to drive growth continues to perform well in our view. Operationally, if you look at our operating leverage and our ability to manage cost and drive efficiencies as a company, I'm pleased. I mean -- and I'll use length of stay as an example, but we're seeing really good improvement this year in the management of length of stay and our overall margin performance has been quite good as we've gone through the first 10 months. In terms of our people, and that's a really important piece. I mean, we're 315,000 colleagues that took care of 44 million patients last year. So we are fundamentally in the people business. And so when I look at things like our engagement with patients, with our employees, with our physicians, our engagement work continues to perform well, and we're seeing improvements really across all 3 of those categories. And we're also seeing the results of our workforce development efforts. And so we see things like retention and the production of our education capabilities like Galen and our physician residency programs continue to gain steam. So overall, I think we're broadly pleased. In terms of surprises, I don't know if I call them a surprise. I would say that as we came into the year, we thought that our volume would be closer to 3% to 4%. I mean 2024 was a really robust year in volume growth. So we're a little short of that. We're back in this 2% to 3% range and, call it, in the midpoint of that. Interestingly, I would say that where we are a little short of our original expectations are things like Medicaid and self-pay. And so that payer mix rotation has produced a good net revenue growth and a good economic performance. And I'll end there is I think financially, we're -- we've had a good year through the first 3 quarters. And so we're pleased as we sit here today and are looking to prepare for '26 and beyond.

Yes. No, that's great. When you -- on the third quarter call, you guys gave some high level puts and takes for next year. One of your comments you made is you thought that volumes would continue to be in sort of that 2% to 3% range next year. Can you give us a little bit of flavor for what gives you some confidence on that?

Yes. And Stan mentioned this on the call, but I'll reiterate, part of this is what we're seeing in our markets. We have 43 markets. Our markets tend to have population growth that's above the U.S. average. They tend to have strong economies, which drive things like employee-sponsored insurance coverage. And if you think about the work of the company to expand our networks, and we've had a string of years now where we've had heavy capital investment years, including this year, where we'll spend $5 billion in capital. That work to build more resilient and expansive networks is allowing us to increase our competitive position. We are on almost 19 quarters of year-over-year growth. And so I think the fundamentals of what we're seeing from the bottoms up from our markets is part of what gives us confidence. At the macro level, when I think about the big mover in that will be EPTCs, right? So if EPTCs get extended here at the last minute, I think you could see us being maybe at the upper end of that 2% to 3% range. If they expire, I think you would see us on the lower end of that range. So that's how I think about the 2% to 3%. But the confidence still comes back to the fundamentals. Fundamentally, we take care of patients, and we're a hospital-centric health system. And so it comes down to the strength of our markets that give us the most confidence.

Okay. Okay. A couple of things maybe on just that comment. There had been this chatter that if we're going to have people drop off, they don't think they've got the benefits next year and the coverage next year that perhaps we'd see this pickup and a rush to get last-minute surgeries, et cetera, et cetera. I don't know how your scheduling, looks for November, December because I would assume it wouldn't have started until we get an open enrollment. Are you seeing anything? Or is there any -- I know you don't like to comment that much on intra-quarter, but have you seen any activity that suggests we've got a rush to get care done here at the end of the year?

Well, let me not comment on fourth quarter. I need to be consistent with that approach. But I will say when we look deeply at third quarter and our results for third quarter on volume and demand, we didn't really see indications that there was a pull forward of demand in third quarter. I think it's a legitimate question, right? And in past recessions, for example, you could see a little pull forward of demand as people were thinking about the coming year. I don't know how closely connected the general citizen is to this debate around EPTCs yet. But at this point, at least through third quarter, we have not seen enough evidence that would suggest that third quarter was impacted by a pull forward of demand.

Are you giving -- I don't know how much -- maybe you have a window on this. When people are going to sign up and they're seeing these change in benefits, do you have educational programs in the local communities that you give? Or is that mainly up to the insurers and the brokers to do that?

We do. And so we've worked over the last really year preparing for this, really hard with Parallon, our revenue cycle operation to have pretty expansive output through mailers, through phone calls and through on-site financial counselors over the last several months that have helped people who are coming in with the exchange coverage, understand their options and understand their enrollment process for the coming year. We are not brokers. So we can't sign people up personally on the exchanges, but we have put forward a pretty significant effort to try to help educate and connect the exchange population with their options and with what to look for, for 2026.

Okay. You talked about the range, the 2% to 3% range. It seems like people have -- I think the investment community sort of thought the range would be a little wider than the 2% to 3%, just 1% based on -- mainly based on the growth you've seen. You've seen really good growth in the exchange volume in the last few years. Is there any -- it's hard for you to comment on the disconnect of maybe investors and analysts thinking it would be a wider range than that. But is there anything you can add to why you're confident it's only about a 1% swing factor no matter what?

Well, I already mentioned the fundamentals on the market.

Right. So you think it's more of the...

I think that's a piece of the story. The other thing I would say is if you look at it by payer, which is, I think, really what you're speaking to. We continue to see the baby boomers age into the Medicare program. So I think the movement into Medicare will continue to be at a bit of an elevated level here in '26 and really into '27 and '28. Broadly, we're comfortable that employer-sponsored insurance seems pretty steady. And frankly, if EPTCs do expire, there will be a component of people who are on the exchanges now that we think go back to employer-sponsored insurance. So you could see even some lift in employee-sponsored insurance as part of that rotation on payer mix. Exchanges are the big wildcard, right? And they're 8% of our volume. And so I think what some people are thinking, though, is that there's a cliff. In other words, if EPTCs expire, that there's -- there'll be this 1-year movement to the new run rate. We actually think that it may take 2 or 3 years for that to fully settle out. I think that people who are on the exchanges that have chronic diseases and the like, I think they're going to try to stay on the exchanges, and they may drop a metal tier, they'll stay. I think, again, there'll be some folks that go back to employer-sponsored insurance. And then there will be some folks that become uninsured. The other thing I would say of that, though, is not like people who go from having health care insurance on the exchanges to being uninsured, they don't stop using health care services entirely. I think they utilize it at a lower rate than when they had coverage, but it doesn't go 0. What changes is they pretty much just come to the emergency rooms. And so there's a little different rotation there, A.J., but if you just think about the -- all the factors that make up a volume growth, on demand, EPTCs and the exchanges are one of those factors. But we believe that the outcomes, coupled with all these other items that I've mentioned, still largely bring us into this 2% to 3% range is our best thinking at this point.

And when you comment on the payer mix shifts, so do you have any estimates to share about how many would end up uninsured? How many would end up going back to employer-sponsored coverage? How many would stay on the exchanges, but trade down metal tier? Any thoughts on that? I know you haven't given formal guidance, but I'm asking around those.

I would be disappointed if you didn't ask, A.J. We're not going to size it yet. We will give as much information as we can on the fourth quarter call about what we think the impact is going to be. I also think -- and you know a lot about this, so I think this will resonate. These are estimates. This is a pretty unique event. And so trying to figure out exactly how 24 million people will act and what choices they will make, there's a bit of a range here, including, I think, a 2- to 3-year process for that all settle out. So we're not going to size it at this point, but we will give you more information and the best information we can when we give you our 2026 full year guidance.

Okay. No, that's great. I mean another big mover this year and the last few years has been the supplemental payments. And you've got a couple that are pending, I think, that could be fairly meaningful for you, Florida, Georgia. There may be others that you're tracking that are important. Any update on those? Any thoughts on what -- where those go?

Well, for context, the grandfathered application opportunity really came out of the One Big Beautiful Bill. And we viewed it as a help. I mean there's positives and negatives in everything, right? And so there's the One Big Beautiful Bill reforms over the next decade, really, the payment amounts and the tax rates related to STPs, but it also gave us this opportunity for states that filed pursuant to the grandfathered provisions to enhance their programs in the meantime. So it has the opportunity to help us in '25 through '28 navigate these reforms and not only the One Big Beautiful Bill, but what happens with EPTC. So these are helpful. These are a good thing, and it was part of what I think of the bargain of the One Big Beautiful Bill. There are 5 states whose applications I would call material to HCA, meaningful to HCA, 2 of the 5 have already been approved. That's Kansas and Texas. There are 3 that are still in review by CMS, and that's Florida, Georgia and Virginia. There are a couple of other states that have filed, but they're not nearly as meaningful as those 5. And so we are waiting to see now that it looks like the government is going to reopen, assuming that the House passes it and the President signs it. And we're hopeful. We're encouraged based on what we saw from the CMS review and approval process before the shutdown. But they're not approved yet, right? They're at CMS, and we're waiting to see what happens here once the government reopens. But those 3 applications would be helpful for sure. And they would help us kind of navigate the rest of this year and then really through '28. And then really, if you think about even starting in 2028, it gives you a bigger base to start with as you go through the reform cycle through that next 7 or 8 years.

Right. And either with the known ones or all of them that are on the table, have you -- are you able to size how much they might be worth?

We haven't sized them yet. We will give more information in aggregate on our fourth quarter call. I mean, as you know from our past, we don't tend to size individual programs because they move around so much. But we will give you our best thinking about the aggregate net impact of all of our programs, including what happens with these remaining 3 applications on our fourth quarter call when we give '26 guidance. But suffice it to say, like, these are good things. These are helpful things that I think will -- if we can get them approved by CMS, will help us navigate both the EPTC environment should those expire and then over the longer-term view, help us navigate that the reform to Medicaid. So we're hopeful that they get reviewed, and we view them as a positive potential for the company.

I think we've estimated going through the state filings, et cetera, that it's potentially in aggregate about $700 million of potential EBITDA tailwind to you. So if all the ones that have been improved and the ones pending. So I'm not going to get a reaction from that to that. What about just the politics? I know you guys are intimately involved in making the case for the industry and for HCA and Washington, either -- I think a lot of people have jumped to the conclusion that these enhanced subsidies are not going to get extended at this point given how things played out over the weekend. What are you hearing? Do you have any additional insight you provide on that? And more broadly around anything else that's a health care initiative that's important to you that's in the works?

Well, I mean, I think you guys get a sense of what's going on, right? And the company, if you go back even a year ago, we've put forward a lot of effort to first raise awareness of the importance of EPTCs and not just to health care providers, but to people. There's 24 million people now, almost 25 million people who get their coverage on the exchanges. And so we spent a lot of time and effort as a company, drive working with a broad coalition of other insurance companies and providers and patient advocacy groups trying to raise awareness of the potential impact on affordability and on coverage of a lot of folks. And then it was clear through those efforts that there was an increased level of concern and frankly, on both parties. I mean, I think the fact that the government shut down, at least largely on this issue is a recognition that this is a matter of concern. Now what we're looking for is what happens with action, right? And so I do think here over the next 4 to 6 weeks, there is still an opportunity here for a resolution of this and potentially a deal that could either extend these -- the enhanced program, the tax credits in either their current form or some modified form. But we're on the clock. I mean, as you know, I mean, we're down here now to the last bit of time here. And so we're watching it carefully and advocating carefully. We'll know soon. And as we've talked about before, while the company continues to be heavily active in trying to advocate for this for these -- and frankly, for these -- our communities that we serve and for these people who get their coverage in this way. We're also preparing. And so we've spent a lot of time as a company over the last 12 to 18 months, working on our resiliency plans, working on our digital transformation agenda to really prepare the company for the future, whichever course, frankly, the exchanges go.

Right. Okay. Maybe...

Let me say this, too. I mean, this package does include some good things. And so PayGo, for example, which is a great thing for the industry. They dealt partially with the extenders, which is a good thing. So there were some good components of the package.

Okay. I mean one of the things that was in the Big Beautiful Bill was this rural hospital fund. I mean you're predominantly urban, suburban, but even in HCA's portfolio, there was some thought that there might be something. Have you heard anything more from the states or probably not as much from the Feds about how that money might be allocated? Is there an opportunity for you guys there?

We think about 15% of our hospitals are in a rural classification that are adjacent to our urban and suburban markets, but still have rural characteristics that we think largely could apply. We are watching the state's applications very carefully. They're largely kind of coming into Washington now. We don't have a sizing yet of what it could mean. But I think there is some potential upside there. And we'll know more here over the next few weeks as CMS processes all 50 states applications, and we get a better sense. I mean half of the money kind of goes to the states on an equal basis, right? And then half the money is an application that each state files and competes for money. So we've still got to learn about how that fleshes out. But I think it's -- it could be a moderate type of benefit for us, but we're still watching it.

Okay. Maybe just to ask about a couple of fundamental areas. On the expense side, labor, it seems like you're at a pretty stable point there. It's certainly all the post-pandemic pressures have eased at this point. You're down to a pretty modest level on contract labor. Is it steady from here? Do you think there's opportunities on the labor front? And I know professional fees has been a pressure point. What's the latest thinking there as well?

Well, let's start with clinical labor first, and then we'll get to pro fees. But on clinical labor, I do think we're operating in a bit of a stable operating environment right now. And all of the work of the company over the last few years is paying dividends. In addition to just the macro environment stabilizing, HCA has been hard at work on our workforce development plan. So you think about the expansion of our Galen School of Nursing, our expansion of our physician residency programs. The work that we've done with our management teams to adopt best practices on retention have paid dividends. And so that -- we have seen the workforce stabilize and improve in addition to the macro environment stabilizing. So yes, I do think on clinical labor, we're in a pretty good spot coming into 2026, a spot of a bit of stability. And so I echo that. Professional fees are continuing to be a bit of a moving target for us. I mean we've spent the last 2 to 3 years, working really hard in the emergency room in the hospital side, hospital medicine side with our acquisition of Alaska. We had to do that. That was a partnership that was managed by Envision as they were going through their bankruptcy process. So we pulled that in and have spent a significant amount of time and energy and resources, stabilizing that workforce and integrating that capability into the company. And I think our management teams and frankly, the physicians and staff of that entity have done a wonderful job. So we're feeling better about our emergency room and hospital medicine side. The remaining challenge in our view on that component of hospital-based physicians is really the reimbursement challenges from payers. And so we are continuing to work with our payer partners to try to get fair reimbursement for those professional services. As we're sitting here today in '25, the bigger challenges are anesthesia and radiology today. There are pretty significant supply and demand imbalances with anesthesiologists, mid-levels, radiologists that we're still working through. And so we are working through a series of action plans, including building some internal capabilities when we need to employ anesthesiologists. But we're working hard on the allocation of what this is, is a very scarce resource. So we're working on things like our scheduling routines, our site of service management routines, very operationally driven to try to better manage the resources we have, working with our vendor partners and our anesthesiologist teams. Radiology has that same dynamic. I mean it's being affected a little bit by supply and demand. And so we're working with our radiology groups to try to be as productive as we can. I do think over the next 5 years, AI will be helpful in radiology as well. But those 2 areas of professional fees continue to be a bit of a challenge. So we're up about 11% this year, same facility on pro fees, largely driven by those 2 categories. And I don't think that we're ready to say that '26 will be back to just normal inflationary levels. So I think it's still going to be a bit elevated next year.

Just remind us what percent of revenues or however you want to size it, roughly is professional fees.

It's about 24% of our other operating expenses. So if you just go to the income statement and look at other operating expenses, it's about a 1/4.

Okay. I know from time to time, there's a particular area of emphasis or focus on the supply expense area. As you move into '26, are there particular opportunities? How would you characterize that? Is that relatively stable?

It's stable. I mean the -- there's 2 kind of moving parts, right, that we're all watching very carefully. The first one is tariffs. And I think HealthTrust and our supply chain teams and frankly, our hospital management teams have done a wonderful job navigating the challenged environment around tariffs. And we have not seen a super material impact into 2025. But there's a lot of work there, right? There's a lot of work in terms of our sourcing, our contracting our strategies around vendor selection and the like to really help navigate and manage the fluid environment that is tariffs. And that work will continue into '26 and beyond for sure. So that's one area of work that HealthTrust has and continues to stay focused on. And then the second area would be our resiliency plans and supplies. So things like adoption of new technology. We have a series of initiatives in both pharmaceuticals and medical devices that we work with our management teams on that help manage the mix of our supplies. So all of that work combined has produced a good result for us in '25, and we've got a robust action plan in '26. So I'm hopeful. The only other thing I would say about HealthTrust and our supply chain team, which we're -- think of as an at-scale shared service for supply chain, right? I mean we centrally manage it. We have pretty robust and sophisticated warehouses and logistics management teams. But our big agenda for '26 and beyond is digital. And the opportunities that we're seeing through things like AI, machine learning, even the basics on robotic process automation throughout HealthTrust and our supply chain continue to be very encouraging. And so HealthTrust is hard at work. It's a great organization. We're super proud of those teams.

Yes. You mentioned AI a couple of times, and we've had some panels on that at the conference here. I know you guys have made some significant investments there. What -- where are the biggest opportunities in AI for the company?

We're trying to take a balanced approach here. And so we organized our AI work into 3 domains: clinical, operational and administrative. It's really important on the clinical side, which is, frankly, much harder and it's going to take it longer because of the inherent risk. But on the clinical side, this is our opportunity to engage our physicians and our nurses and our clinical teams on AI. And so it's important. It's important to make sure that a chunk of our investments are pointed at the mission of the company, which is taking care of patients. So we have a number of work streams in AI that are pointed at patient safety and quality outcomes and making those better. I'll give you a couple of examples, and then we'll move to the other domains. But we are hard at work at this nurse handoff tool. We do about 400,000 shift changes a week in this company. And think about this is when a nurse is leaving shift and the nurse is coming on shift and the amount of time that they're in overlap because they're doing this patient handoff is longer than you think it is. And we're finding -- we're working with Google on this. We're finding an opportunity to use AI to really synthesize the medical record and the operational records and give our nursing teams a much more synthesized and effective way to do shift handoff as they hand off their patients. Given the amount of times we do this in the company, that has a real opportunity clinically to help our nurses through what is one of the riskier areas of work, which is handed off patients between shifts. And so we're excited about that. We're live in 8 hospitals now, and we look to roll that out in 2026 broadly across the company. We're also working, and this is with a partner on using AI to read fetal heart monitoring strips in our labor and delivery service line. And that work is really fascinating using AI to really support our nurses and obstetricians in how they monitor patients, moms and babies as they go through the delivery process. So that work continues. Actually, that algorithm is at FDA for review and approval. So we're excited about that. Several others in that category. But let me speak to operations quickly. And the operational domain, we're rolling out an AI-driven scheduling and staffing tool that I think we're just short of 100 hospitals now that are live on the nursing side of that. That work continues, and I think has a lot of potential in the future. I will say what we've learned through that rollout, though, is how hard it is to roll out AI tools and change behavior on the ground. So we're learning that we have to be just as good at implementation and change management as we do about building AI tools. And so that investment continues in the company as we continue to learn and iterate. And then really the domain that I think has the shortest pathway to value is administrative. So think about Parallon and supply chain and IT and human resources and even our physician practice management platform, millions of transactions, more centralized operations, more standardized data, and we're finding a long list of use cases to get organized around to digitize our workflow and bring artificial intelligence into efficiencies and effectiveness and the administrative work. So I mean, broadly, I'm pleased with where we are. We're in early innings with this effort. We're trying to be judicious in our allocation of resources and making sure that we're getting either a clinical or a financial return on these investments as we scale them. But overall, I'm really encouraged. I think digital transformation will be one of the key strategic initiatives of the company for the foreseeable future.

Yes. Interesting. Some of those use cases are pretty interesting. What about capital? We had dinner last night. People were talking about different capital questions. You guys, like you said, $5 billion. Is the priority on where that spending is going changed over the last few years? Maybe some of the buckets, what are some of the priorities there?

Well, we start always with the basics, right? So maybe 40% of the spend is infrastructure. It's making sure that our facilities have the right medical equipment that the roofs and the boilers and chillers and the air handlers and all the kind of heavy infrastructure that we have to have, including things like [indiscernible] and renovation is solid. I mean we have to have really good facilities for doctors and patients and nurses who want to practice, and that's a chunk of the work. Our growth capital continues to be a balance between inpatient and outpatient. On the inpatient side, we've been adding about 600 beds a year to our inpatient footprint to deal with demand growth. I will say that our work to improve our length of stay has helped us as well deal with demand growth in addition to adding bed capacity. But we still find markets where occupancy levels tell us that we need to add beds. And so we are doing that. On the acute care frame, we are also continuing to invest on things like emergency room expansions, operating room expansions, cath lab expansions and the like to fund our service lines, and that work continues. And then we have a balance that's pointed to outpatient. And as we sit here today, we average about 14 outpatient sites for every acute care hospital. And that's up pretty materially over the last 5 to 10 years. Over the next decade, we think we're going to need something like 20 outpatient sites of care for every hospital as we continue to develop and expand our networks, get further into the suburbs, meet patients where they live and provide access for patients. And so things like urgent care facilities, freestanding emergency rooms, surgery centers, physician clinics and the like will continue to be a big component of our capital spend and also of mergers and acquisitions. I mean we've been active on the outpatient side with acquisitions as well. So I think that idea of network development is still the fundamental for us, both to be able to service demand growth, but also to take market share. And we believe our competitive positions in our key markets are key. And this capital investment program is pointed to help us ensure that we continue to grow and maintain competitive strength.

One of the debates over dinner last night with a group of investors was around surgical robotics and how prevalent that will ultimately be. I know you guys have that in virtually all of your facilities at this point. The question was, will every operating room have to have one eventually. I wondered if you had any thoughts on that, where you guys are at on that and what you think about that?

Well, I don't know that I'm ready to say that every operating company is going to have a robot. I would say that HCA, we're believers in robotic technology. And we've been good adopters, not only on just Intuitive Surgical, but also in spine and orthopedics and other pulmonary. There's been a pretty widespread technology introduction around robotic surgery across a lot of service lines. And we have found generally our physicians adopting these. I think the results for patients and doctors are such that there has been increased utilization of robotics. Do I think that continues in the future? I do. I don't know that I'm ready to say that like every OR that currently will have a robot. But I do think that robotics has produced a good benefit for physicians and patients, and we will continue to support our patients and physicians accordingly.

Yes. I had the same answer you did. It's hard for me to imagine that everyone would have it. But I was just curious on your reaction. Obviously, a big part of the story has been how much on share repurchases, I think this year, you'll do $10 billion. Let's just make sure we're on the same page about how the company is thinking about that going forward. Your cash flow continues to grow dramatically where we see just share repurchases keep pace. Sometimes I'm asking about dividends and your view on dividends. Is that changing? What's your thoughts about capital allocation?

I think you can see some consistency in our framework over the last 5 years for sure. And in addition to growing cash flow and using our capital the way we have, we've also had some good delevering on our balance sheet. And so our leverage position is in a really good spot. Our balance sheet is in a really good spot as we head into 2026 and beyond. But I think you can take some consistency as being the direction right now. We're not ready to size the dollars yet for '26. But I do think the framework that we think about and starts -- and we mentioned this at Investor Day, but I think 45% to 55% of our capital allocation will continue to be capital investments back into our facilities. We continue to see significant opportunities to invest in our markets. Our pipeline today sits at about $6.7 billion in flight funded. And every day when we meet with our operating teams that what comes to us continues to be very attractive. So I think you can expect to see that being a priority. And then for what's left, like we do mergers and acquisitions every year. I think you've seen some consistency in our approach around dividends. I think you would see that in the future. I don't expect you're going to see material changes to our dividend approach. And then we've been doing share repurchase. And I think broadly, without giving dollars yet, I think broadly, that formula has -- first, our view is has worked well for funding the mission of the company and taking care of patients, but also creating shareholder value over time. And so I think from a framework perspective, we would expect to be consistent largely with that approach. And -- but it's also flexible. And if opportunities present themselves, I think if inorganic opportunities present themselves or what have you, even though we'll always be disciplined, we have that flexibility in our capital allocation program to also be flexible.

All right. Well, great. I think with that, we'll wrap it up. I really appreciate Mike representing HCA today and the story. And thanks, everyone, for participating. Have a good rest of the day.

Thank you, A.J.

All right.