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

All right. Well, thanks, everybody, for joining us here. I'm Ryan Langston, I'm the health care services analyst at TD Cowen, Day 2 of our conference. I appreciate you all making the time. Very excited to have HCA here. We have Mike Marks up here, EVP and Chief Financial Officer. We've got Frank Morgan, Investor Relations upfront, too. Real quick, probably don't need much of an intro, but HCA largest U.S. hospital provider, 190 hospitals, 2,500 ambulatory sites of care, surgery centers, EDs, urgent care, you name it, operates in 19 states in the U.K. Mike, thanks for being here.

My pleasure.

Appreciate it. So maybe a good place to start for us. On the fourth quarter call, you sized this resiliency program, at least for 2026, I think around $400 million benefit to offset some of the headwinds from the APTC expiration. Maybe help us within that $400 million because we've been getting this question a bit. Just maybe some of the components of that, maybe between variable or fixed or rev cycle, rev integrity. Just how do we think about it maybe between revenue expense? Any way you can bifurcate that would be helpful.

Well, let me start by just providing the context. I mean we have 4 focus areas for our resiliency program. Revenue integrity is number one, asset optimization, which is throughput, which would be #2, and then fixed and variable cost. Within those 4 areas, we're really building enterprise-wide multiyear capabilities. So this resiliency program for the company, as you know, we've been working on for a number of years. And so coming into '26 over the last, call it, 12 to 18 months, we put forward a really strenuous effort to both enhance and accelerate our resiliency program overall to do our very best to offset as much of the headwinds that we thought could happen with the Affordable Care Act as possible. And so that's what you saw with the $400 million. And it really reflects those work streams that we had enough visibility into their implementation status, their execution, their tracking. That we had confidence to put a number on for our guidance for 2026. But when I think about resiliency, I think about this idea of multiyear and being a program. And so resiliency will be a key strategic imperative for HCA over the next many, many years as we go through the back half of this decade. And it involves a number of work streams, hundreds of work streams across those 4 focus areas. So think about the '26 component related to $400 million as being those components of the work streams that were far enough along that we had confidence in implementation that we could size and track. So that's how I would size it. I'm not -- we're not giving kind of breakouts into the 4 focus areas, but that's generally the way to think about the $400 million. And then we're going to continue to work on this through the back half of the decade.

Got it. Obviously, you also talked about sizing, you size the APTC expiration, $600 million and $900 million headwind for '26. So not looking for intra-quarter updates in particular, but just any insight you can give us in terms of what you're seeing on that population so far? I know we're only a couple of months in, but anything you can give us there on that sizing, again, not intra-quarter financial updates.

Well, let me stick with -- because to your note, we're not going to give current quarter viewpoints. But when I think about that modeling assumption, I always start -- and we said this on the call, I always like to remind everyone, it is the component of our guidance that involved the most significant judgments. And our modeling team has been working on this for 12 to 18 months. Both looking at our past experience with our exchange population and movements between exchange populations in Medicaid and ESI populations over time and a lot of external data from other modeling sources. And so there are 2 or 3 really key assumptions that we are watching very carefully here in first quarter. And let me go through those and give you a sense of what we're watching. And then we'll give everyone updates as we go to first quarter and second quarter and third quarter. But the biggest one is the effectuation rate or the attrition rate. And so here in first quarter, really going through even April and May, we're going to start getting a better sense of the number of people who don't pay their premiums and leave the exchanges. And so that attrition rate is one of the modeling assumptions that we're watching carefully here. And again, we'll give what we can on our first quarter call about what we're seeing. The second area of modeling that's important is that shift between metal tiers. And what happens -- how many people, in effect, go from silver to bronze or from silver to gold, likely more silver to bronze. And so that we're watching in a couple of ways, what happens to utilization on that population and then what happens to collectability of patients amounts due. So those are key components of the model. And then the third one that we're watching carefully is for the folks that leave or don't end up being covered with the exchanges. We are estimating that 15% to 20% of those become covered by employee-sponsored insurance with the balance going to uninsured that movement is really important to the overall model. So validating here as we go through first and second quarter, did we get that movement back to ESI at 15% to 20% of those that left exchanges is going to be an important part of the model. And so all of that we're studying, and we'll give an update in first quarter.

So it sounds like at least in the first quarter, you might have a little bit more updates.

We'll have more, but it's going to take time, really getting a sense of this year. And I think everyone in the audience knows this, but we issue annual guidance, not quarterly guidance. So our guidance for '26 is full year. And so keep that in mind. And so we're going to have to just see how that matures over the next several quarters. We will give what information we can on first quarter.

Another thing you mentioned on the fourth quarter, I think Medicaid lower acuity ENT, I think, you called out specifically kind of a little bit softer on the outpatient side in the fourth quarter, but still sort of an attractive revenue stream for you. I guess, is that just more shift towards higher acuity? Is there something else in those lower acuity procedure categories that's maybe driving a little bit of that softness?

It's really interesting. When I pull up and think about outpatient as a component of our business, our revenue growth in fourth quarter on outpatient was actually higher, stronger than our inpatient revenues. And so broadly, we're still seeing good activity across all 4 of the segments of outpatient that we track, emergency room, diagnostics, our ambulatory platform and surgery. And surgery would be both hospital-based and our surgery center platform. When I think about our surgery center platform specifically, we really saw 2 components that impacted the case counts versus the overall revenue production. One of them is acuity, and we are seeing declines in some of our lower acuity categories of surgery. The one that we called out was ENT, and that's one of the drivers. The other is payer mix, where we are seeing a decline in Medicaid volume in our outpatient surgery platform and good growth in the rest of the payer mix components, which has as you can imagine, has a positive impact on revenue. And so our outpatient surgery platform continues to perform well when I think about revenue, when I think about profits. I think those 2 dynamics just impacted the case counts a bit for the year. On lower acuity, I think it's the puts and the takes. And the lower acuity has a little more impact on the surgery centers than it does hospital-based outpatient. So that would be the only other clarifying context I could give.

On the inpatient surgery side, fourth quarter, I think roughly flat volumes kind of year-over-year there. But if you look at occupancy in the inpatient side running really all-time highs, I think it's around 73%. Is that a capacity constraint issue? Or is that a mix issue or just this continued shift from inpatient to outpatient or anything you're seeing there?

Over the last several years, we've put a lot of effort into maintaining our surgical capacity. And so like you've seen us do for inpatient beds, we have had a multiyear effort to both invest in our operating room platform. So we've added operating rooms to our hospitals over the last several years. And we've had a pretty serious significant efficiency play where we're trying to manage things like turnaround times and efficiency. So the combined effect of adding capacity and managing our operating rooms really have prevented a capacity block. We did not see in '25, and we do not expect for '26 to have capacity being an issue relative to our ability to grow surgical volume which is great, and that's reflective of the work that we're doing. Now I do think over time, there are shifts that occur on inpatient and outpatient. We're used to that. We're used to as well is that with new technologies and kind of the aging of the population and chronic diseases that you do tend to see a backfill on the inpatient side as well over time. So I think those trends that we've seen over the last many years continue.

And on the occupancy, you're sort of hitting on those all-time highs. Where is sort of the rev limiter there before you really have to maybe make sort of a step investment. I mean you're always investing in beds and building new hospitals and things. But is there sort of an average occupancy we should think of where you're going to have to make those investments in another inpatient wing or something so you don't run into those capacity constraints?

It's a great question. We have a multiyear capital planning approach. And so we are looking out because building inpatient beds is you don't fund a project and it opens this year in the hospital business 6 months later. So we look at a multiyear approach to both adding beds, and we've been adding, call it, 600 to 700 beds a year in our inpatient units and our length of stay management routines through our resiliency plan, where we've had really good results the last couple of years in managing length of stay. Length of stay is also a big part of our resiliency plan into the future. And so the combined effect of adding beds and reducing length of stay have allowed us to even with the volume growth we've had in the last several years, to keep our inpatient occupancy in this 70% to 75% range. And so our plans for the future include a planning component to try to manage that occupancy level by adding beds and continuing to reduce length of stay. There's not a perfect number that you would say above which you have a trouble. And of course, we have 191 hospitals that have different levels of occupancy, right? 73% is the blended average. But when you get to 80% to 90% full, it does start challenging your operations. And so we try to make sure at a hospital level that we're looking at those units and hospitals that are running hot and that those generate the funding request and frankly, even the enhanced effort on length of stay.

On adjusted admissions, guiding to 2% to 3%, again, look back through our model, I think it's been a decade ex-COVID that they haven't been in that level. But we do get some questions occasionally, so I'll just ask it. What gives you sort of that confidence that you're going to hit that 2% to 3% again in 2026?

Well, I mean, the first thing would be the momentum of the company. And I think the HICS reforms are noted, and we took those into account with our guidance. But when you just kind of look at the track record of our 43 markets and what we see from both demand growth and our ability to take market share as we've invested into our networks and continue to invest into our networks, there's some durability there that we see in demand over time that's important. And then the other thing I would just note is you just think about those payer categories underneath that is that I think we still think Medicare based on what we've seen in the past, should be 2% to 3%, if not even on the top end of that range from the -- from our past trends and from the number of people aging into that program in '26 and beyond. And then number two would be Medicaid, whereas in the past, we've gone through a couple of years here with Medicaid redeterminations where our Medicaid volumes were running below prior year levels. Those seem to have recovered if you look at the back half of '25, and I'm expecting 2% to 3% growth in Medicaid in '26, kind of on par with our average. HICS will go down 15% to 20%, as we noted on the call. I do think that our commercial population, excluding exchanges, will be 2% to 3% in that range is kind of built into our assumption of our overall range. And then with this movement out of exchanges into uninsured, our uninsured volumes will be hotter in '26 with that conversion. It could even be 10% or so. So I think on balance, this idea of 2% to 3% still makes sense to us. It feels durable from our past. It feels durable from the investments we continue to make and have been making. And then you see the trends that you see by payer.

Inpatient-only list going away, how do you think about that given your sort of very heavy bend to inpatient? And does your sort of 50% of the business in Florida, Texas have any sort of impact on that? Or just maybe general thoughts on that kind of as that phases in, how you'll sort of approach that?

Sure. Well, the inpatient-only list is Medicare. So keep that in mind, and it's phased out over 3 years. And so when we look at the modeling of this reform, if you will, of the inpatient-only list going away, I think about this as each year a set of procedures where now the surgeon, the physician gets to make the decision. In the past, being on the inpatient-only list means that you had to do that case as inpatient. And so the physicians are going to be making a patient-by-patient assessment on what that patient needs. Do they need inpatient level of care? Do they need hospital-based outpatient surgery or procedures? Or is that patient appropriate to go to a surgery center? And so we will see some shifting of that over time. Our modeling suggests that it's pretty manageable for the company. But it does highlight, I think, the value of HCA's network model. And if you just think about our network model, we invest every year into our inpatient facilities to handle the capacity challenges we just talked about on the previous question. But we're also adding outpatient facilities pretty significantly. And we added over 100 outpatient facilities last year. By the end of the decade, we intend to have about 20 outpatient facilities for every hospital. We're at about 14 as we close 2025. And we believe that network model will give us the network access and the convenient of care sites for patients to access close to where they live. And then when they need more acute care, an optimized system to help them get to our acute care settings. In that model, I think this expansion of our outpatient footprint will be helpful. It will give us the capacity as things move around between inpatient and outpatient. And it will help us continue to build our competitiveness and take market share as we give patients more access to care across the spectrum from inpatient all the way to ambulatory.

Got it. The Medicaid supplemental payments is expected to be sort of a net headwind this year, if nothing changes, you had mentioned the Texas, [ Atlas ] program, I think, on the call. I guess anything there or even on anything you're hearing from your state program partners on some of these pending programs? Obviously, everybody is focused on Florida. There's a couple of other ones. But anything there?

Well, let's talk about the grandfathered applications first. And there's approximately 5 states that are meaningful with Florida being the most, to your point. And we continue to be aware of review and conversations between CMS and those states specifically even over the last few weeks, which is encouraging. So the review activity seems to be continuing. I am a little encouraged over the last 3 to 5 months that certain programs have gotten approved. So it's not as if all approval activity has ceased. I can't sit here today, though, and predict when or if those 5 programs will get approved. So we're watching it carefully. We're advocating, as you can imagine. But we're all going to just have to wait and see the status of that. On [ Atlas ], really nothing new to report. The new commissioner has started. They're reviewing the program, and we're waiting to see if that the new commissioner will take that program off pause and reinstate it or not. But just to be clear, when I think about our guidance for '26, it assumed that [ Atlas ] goes away. So just in that 250 to 450 is the assumption that [ Atlas ] does not get restarted.

We don't get to see the back and forth with CMS on these programs. They just post them to the website for the most part. Is there -- there's sort of a general rule of thumb because we do get this question about, is there a date or sort of a soft date where if these programs are not approved by X, that may be sort of a leading indicator that these programs may not be approved.

I don't really think so. I mean I think what we'll see is they're going through an active review process. They're being very deliberate. There's no question about that. And some of this makes sense within the context of the One Big Beautiful Bill. I mean, if you think about the grandfathering rules that were part of that bill, frankly, it was one of the components of that bill that was favorable to hospitals, right? If you just think about the give and the take in that bill between the Medicaid reform, the Affordable Care Act reforms, one positive for hospitals was the states could still pursue grandfathering. And so CMS is clearly still working through the rules of how grandfathering is going to work. They issued a couple of guidance letters last year. I think there will be rule-making to this end. So I think what this reflects is them being deliberate and trying to get the structures set appropriately for grandfathered applications. And I certainly have not given up hope. And I don't have a date on a counter that says if they don't get approved by here, then they're gone. I think what we've got to continue to watch is that there's an active review process and that they're working through their administrative processes in a normal fashion. And so that's what we're watching.

Yes. So capital outlays, I think you increased the CapEx spending a little bit, $5 billion, $5.5 billion, $10 billion share repo program. Just thinking about sort of it's a positive, but where the share price is at. Does that change your approach to share buybacks versus as you talked about sort of heavily investing in your markets on the capital spending side, especially given your ability and opportunity to take market share from maybe some of your competitors?

Well, we try to be pretty disciplined allocators of capital. I mean it's one of the hallmarks of HCA over time. We look every year and frankly, in our year as well, but we look every year and we try to think about what's the right balance and allocation of capital. As I think about '26 and the guidance we just updated, first, it was clear to us that we continue to see good opportunities in the hospitals, in our markets to fund CapEx for organic growth. And so that's what led us to increase our capital spending from, call it, just short of $5 billion in '25 to $5.25 billion to $5.5 billion next year. And that's good. That's positive signaling that the opportunities, the pipeline of projects that we continue to see that come up from the field warrant incremental increases in our investments there. We did a reasonable update on our dividend. And then we've got M&A opportunities, and I know we'll likely talk about that here. But -- and then the balance is share repurchase. And so I think share repurchase has been a good component of our capital allocation strategy over the last many years to return shareholder value. We look at it carefully. We do intrinsic stock analysis and all the things that you would expect a company like us to do. But we're comfortable that for '26 that this idea of a $10 billion authorization with the intent to complete a majority of that is the right allocation for us this year. When I think about the future of the company, we continue to be encouraged. We encourage to see the opportunities in our markets for network development. I continue to be excited about our opportunities with AI and automation to drive long-term value. And this building of enterprise capabilities, I think, will continue to help us leverage the scale and scope of the company into the future. And so I'm a believer. And so you see that reference in our kind of balanced and disciplined approach to capital allocation.

Skip ahead then to M&A. So you guys -- I mean, if you look back over the past few decades, you've not been afraid to take some bigger swings. I think Mission Health was probably the most recent example of that from a larger asset. You tried for a few hospitals in Utah didn't work out. So I guess the question becomes it's been almost a decade now since you've done a very sort of larger deal like Mission. What's the opportunity going forward, thinking political, regulatory, but also just sort of opportunity of assets?

Yes. I mean if you go back and look at the, call it, the last decade, our average M&A capital allocation has been, call it, $600 million a year in that zone. So it's meaningful. I will tell you that in our past, what you've seen is a lot more activity on the outpatient side, in market. And so -- and the good news with outpatient is they're a little more economic, right? In other words, you can buy a number of outpatient assets for the same spend as one hospital. And so you pick up this ability to really invest in your networks and expand your networks by doing M&A a little bit more on the outpatient side. We do inpatient acquisitions when they're available. And last year is a good example of that. I mean we acquired 2 acute care hospitals in 2025, one in Florida and one in New Hampshire. And so when we find especially end market opportunities that we can execute, we tend to be aggressive at that and try to make sure that we take advantage of those opportunities. I think over time, you will continue to see us be interested in M&A to build out our networks, both on the inpatient and the outpatient side. I do think that for on the inpatient side, it has to be for sale, which 85% of the hospitals in America are not-for-profit or academic. And so those come for sale when they come for sale, and we're going to have to watch that over time. But M&A is an important part of our balance of capital allocation. And I think what you find with HCA is we tend to be disciplined. And so we try to find acquisitions that fit our model, that fit our market strategy and that we think we can integrate into our system in an effective way. And so within that semblance of balance and disciplined approaches, we're interested in M&A.

In our January hospital survey, we had a fairly large health system respond and say the denials activity from a year-over-year perspective was pretty rough for them, to be honest. Where are you guys seeing sort of that activity from the payer side just in terms of denials or medical necessity or whatnot? Just anything from the payer side versus what you're seeing maybe historically?

Yes. I mean the ramp-up in -- and I'll just -- let's just stick with denials, but the ramp-up of denials over the last several years have increased, and they increased again in '25 from an activity level. So I've not seen the payers change their approach towards medical management. And I agree. I do continue to see that. What's different with HCA is our response. Over the last several years, we've been investing heavily to be able to manage and mitigate denials in a more effective way. And so that's resources, that's systems, a large component of our AI and automation strategy that within rev cycle are really pointed towards denial mitigation. And so when I look at '25, and I'll use '25 is our most recent period, we were able to mitigate the year-over-year impact of denials on through our response. So even though the activity levels have increased a bit, I think our response has allowed us to manage those. Now they're still too high. In other words, the denial write-offs are way still high, and there's a lot of effort that we're putting in to try to clear that cash. That leads me to this important part about partnerships. I mean one of the things that you've heard us talking about is this idea of building strategic partnerships with our payers. And within that, this idea of digital integration and reducing administrative costs for them and for us. And I'm actually hopeful when I look at the status of some of our engagements with several of our really key payers that there's an opportunity here to help the industry, both parties, us and them, do a better job of data, of digital and reducing administrative costs. And part of that, I think, has an opportunity to get to this notion of friction or disputes. So that's my sense of things.

From the commercial payer side, obviously, during COVID, salaries, wages went up, not keeping pace with that. Post-COVID, I think you were successful and some of your competitors and getting maybe a little bit more of a yield on the commercial side. We're sort of coming into that sort of every 3-year now renegotiation period. So the question is, are you able to or do you foresee the ability to sort of keep that sort of, maybe call it, 100 basis points extra yield versus maybe historically where you've gotten on the commercial payer side?

Well, for context, let me give you an update of where we are. We're at, call it, 90% plus contracted for '26, as you can imagine. And we're about 1/3 contracted for 2027. I'm pleased with our access to lives. Our in-network status continues to improve across our products, categories. And generally speaking, for the contracts we've completed, we're still in that mid-single digits range that our targets have been. I do think as we've headed into '26, we are operating in a bit more of a stable operating environment from labor standpoint, which was really challenged during the pandemic years, as you know. I am continuing to see inflation in the physician cost side, and we've talked about that. I mean I think we're better today than we were in '24 and '25. But as we head into '26, I mean, we're still expecting to see high single digits cost inflation here. And then broadly, when I think about things like tariffs and the potential impact on supply costs, we're monitoring that carefully. And so I don't know what inflation broadly will look like over the next 3 to 5 years yet, and we're still trying to get beat on that. In the meantime, we continue to work with our payers to try to land our contracts appropriately. And I think the fact that we're generally moving through our contract renewal cycles in a rational way is a good sign.

A couple of minutes left. You touched on AI. It's always the big buzzword now. Maybe give us a sense where you think those opportunities? I know you've sort of sized it for this year. But is this like a 2- to 4-year opportunity? Is this like a 2- to 10-year opportunity? And maybe how you think that paces as we move through the years?

Yes, it's a great question. It's not short term. This is a long-term capability build for the company. We have -- we've been building our team. So we have an organization in the company called digital transformation and innovation that we've been building up over the last couple of years, going on 3 years now, data scientists, engineers, AI, process people and the like. And we've been really organized about building long-term inventories of use cases. We're trying to find practical real problems that if we solve will help really change our business. It will help us administratively with things like rev cycle and supply chain and IT and human resources. It will help us operationally, manage our hospitals and then it will help us clinically. It's more like 5 to 7 to 10 in terms of the full weight of getting all of those digital products designed, piloted, built and scaled across the company. A little bit quicker in administrative. The administrative for us is shared service platforms with centralized management and more standardized data. So I think over the next 2 to 4 years, you're going to see a lot of activity in the administrative work. Operational is a little bit longer because of change management. We've learned the hard way that implementing digital products across 100,000 nurses and 50,000 doctors is harder than designing them. And so it takes longer. And you have to implement and then iterate, implement then iterate. So 3 to 5 to 6 on the operational side, and then clinical takes the longest because of the risk. And so we're going to be very diligent to ensure that our clinical use cases are managed appropriately, and it will take a bit longer to see those come all the way through to fruition.

Great. I think that's all the time we have. We'll leave it there. Thanks very much, and thanks, everybody. Enjoy day 2 of the conference.

Thanks.