HCA Healthcare, Inc. ($HCA)

Good afternoon. Welcome to Oppenheimer's 36th Annual Healthcare Conference. I am Michael Wiederhorn, the health care services analyst. It's our pleasure to introduce HCA Healthcare and Jon Foster, EVP and COO; Chris Wyatt, SVP and Controller; and Frank Morgan, VP of IR to today's fireside chat. Appreciate everyone attending. I appreciate your time today. And we'll just jump right in.

So maybe just starting out, can you provide us an update on the business? And how do you feel coming out of Q4 into the new year?

Well, thanks, Michael. 2025 certainly was a solid year for the company. We executed on our agenda and our local networks across 43 different markets, we handled 47 million patient encounters last year. And really, all of our domestic divisions had adjusted admission growth year-over-year. And as a company that ended up at 2.4% admission growth for the year. We managed our expenses well, both labor and supplies and all those things collectively they drove a 90 basis point improvement in EBITDA margin, which ended up at 20.6% for the year. So we felt really good about 2025. In 2026, we're going to stay focused on our strategic agenda. We're obviously going to be smart with our capital deployment as we always are. But we're also going to continue to make our investments in the digital and AI agenda and double down on our financial resiliency initiatives and also invest in our network optimization and development strategies.

That's great. So moving on, can you talk about emission trends in 2026? And what is driving your confidence in your historical 2% to 3% growth target despite some of the moving parts in the model?

Yes. Thank you. We do operate in great markets, and I think people know that. And when you look at the track record of our 43 domestic markets, you see population growth, you see demand growth and then our network optimization and development strategies, which are well executed, also add to market share growth. So collectively, across those things, we feel that there's durability there. And that tends to shape and frame up how we think about growth going forward.

Perfect. So can you talk about how you see some of your capital projects driving growth in '26 and beyond?

Yes. Well, I mentioned the growth in our markets. And so we're fortunate to operate where we do. And when you think about where we're investing our capital, again, it's in the network development and optimization strategy, which largely is investing in inpatient capacity and also expanding the footprint of our outpatient sites. Today, we have 14 outpatient sites of care for every hospital in HCA that is connected to each facility. We want to grow that to at least 20 sites of care for every hospital going forward. And that's all to drive towards a composite market share goal of 30% by the end of the decade. I've talked about this network development strategy and the optimization strategy. But basically, it is, of course, capturing the patients and taking care of the patients, where, when and how they want to receive that care on the outpatient side and then helping to navigate those patients to the extent that they need downstream care in our hospitals. We have approximately $7 billion of capital in flight that's going to be coming online between 24 and 36 months from now. And so making significant investments in that particular strategy.

Perfect. So one of the things that keeps coming up is the exchanges. Can you talk about what you're seeing on the marketplace business? And what are some of the puts and takes to your $600 million to $900 million headwind estimate? And how does that estimate assume attrition play into that when we think about it?

Sure. I'll be happy to address the exchanges. And maybe, again, just a little context before we start on how we think about the exchanges for '26. First of all, you know that they were about 8% of our admissions and about 10% of our revenue in 2025. And then as we constructed our estimate of the potential impact in '26, that $600 million to $900 million that you referenced, we really put a very thoughtful and months-long modeling effort together to really work through the different pieces and parts considering internal sources as well as external sources that ultimately went into our estimates. We talked about on our fourth quarter call some of the key pieces that go into that $600 million to $900 million for instance, looking at how much HICS volume do we think we lose, and we estimate that's 15% to 20% of that volume goes away. And then where do those lives migrate? We think about 15% to 20% of those lives migrate to employer-sponsored insurance. There's a benefit to the company from that piece. But then the remainder goes to uninsured. And then we also put a utilization assumption on that as well, where we think there will be a decline in utilization from individuals that move to uninsured because they just won't seek health care as much. So that's how we thought about the $600 million to $900 million in some of the larger pieces underneath it. What we're watching now as we're in the first quarter, is one, effectuation rates. We saw the enrollment on the exchanges come in better, frankly, than we initially expected at about a 5% decline for the nation, about 4% decline for our states. But now we'll -- as we go through the first quarter and beyond, how many people are able to pay or sustain their premiums. And so what's that effectuation of coverage look like? Will we see a metal tier shift? That's something else that we've been watching as well. Will we see a shift from, say, silver to bronze as individuals look for more affordable coverage? And then just what does overall utilization look like for the remaining exchange population. So there's a lot that we're watching here as we move through the first quarter, and then we'll be in a position to talk about that further as we come to our first quarter call as it relates to the exchanges.

Perfect. That's great color. Pricing and acuity, that's something obviously comes up on a daily basis. Can you talk us about some of the price and acuity strength? And what's been driving that historically? And how we should think about going forward as well?

Yes. Let me take that one. Let's start with acuity first. That's something that we've been investing in for quite a number of years, in essence, deepening the clinical capabilities that we have within our networks, whether that be solid organ transplant programs or bone marrow transplant programs, NICU services, trauma services, burn services and cardiovascular services and the like. So that's what you've really seen over time lift the acuity of our hospitals. And again, that is connected to trying to make sure that patients who need care inside of our networks have that ability to get that care inside of our network. So there's also been a retention of patients because of the services that we've continued to invest in. On the pricing side of things, we're 90% contracted for 2026. And the increases there basically come in within the range that we expected.

Okay. Mix, how should we be thinking about the impact of mix in '26 with all the moving parts from the marketplace and Medicaid with all these regulatory changes and so on?

So you know about our assumption on 2% to 3% volume growth overall that we have for 2026. If you look at the mix underneath that, as I think about just by payer category, Medicare, Medicaid and then our commercial, excluding HICS, we think all are going to grow in that 2% to 3% range. Medicare has been growing at that rate even a little bit higher. We think that sustains itself. On Medicaid, as you know, the last couple of years, we've seen really declines in our Medicaid volume, largely driven by the redetermination process that is passed now. So we see Medicaid returning more toward that average overall volume growth that we see for the company. And then on the commercial side, we see the 2% to 3%, in part aided by the exchange dynamic that I mentioned just a few minutes ago, where we will see some patients move from exchange to employer-sponsored insurance that will help in that 2% to 3% on the commercial side. On the exchanges, I've already mentioned, we see a 15% to 20% decline. And then we'll see an uptick in our uninsured volume as well, again, from individuals that we anticipate are going to lose exchange coverage. And so we'll see an uptick in that payer class. So that's how we're thinking about the mix of volume underneath our overall 2% to 3% assumption.

Perfect. Can you update us on the new state directed payment programs that could still be approved and kind of what's going on there? And also, can you remind us what drives the wiggle room between the top and the bottom end of the range?

Yes. So as a reminder, our guide this year on state supplemental payments was a $250 million to $450 million decline in net benefit year-over-year. And we said there's really 3 primary items that are driving that. One program that's been paused in the state of Texas. We'll have 4 quarters of benefit in Tennessee versus 6 last year and then a retro payment in the state of Virginia. Those are really the drivers for why we think we have a decline in state supplemental payment program net benefit. What drives us within the range really comes into these retro payments that we might get in any given state and are they more or less than we expect. So that will be what will help determine where we are in that range. I think importantly, we've noted that what that range does not consider are these incremental applications that have been filed in states like Georgia and Florida for additional dollars that were allowed to be grandfathered under the Big Beautiful Bill. You have probably seen that the State of Georgia program was approved recently. So we were very glad to see that. That continues other states that we have seen get approved by CMS. And so we are very happy to see states continue to get approved under this grandfathered construct. The state of Florida, we continue to watch. We know there is ongoing dialogue between CMS and the state regarding that program, but nothing has been approved yet. So we will continue to monitor that one, but we're encouraged about the ongoing dialogue in that state. And then again, just overall, that we continue to see movement in terms of state applications being approved.

Perfect. How do you see some of the Medicaid cuts under [ OB3 ] impacting you?

Yes. So I'll take that one as well. Just thinking about the Medicaid cuts under [ OB3 ] and maybe just to remind everybody about those cuts. What happens in 2026, we think, is largely positive for the company, and it really is about these incremental applications that I spoke of that some have been and then some we are continuing to be hopeful will be approved that will provide some upside in 2026 from a supplemental payment standpoint. Then in 2027 is when we start to see changes occur in terms of the cuts. Work requirements will be implemented starting in 2027 and then the supplemental payment cuts will start later in '27 and then move beyond that. We've said in previous earnings calls, we think that those cuts are manageable for the company. One, because of what we have in terms of the incremental benefit. Two, because of the runway that we have for these cuts to take effect, as you know, the supplemental payment program cuts are going to be phased in over a number of years as the payment cap comes into place or the tax phases down in expansion states. So we have a time line for that phase in and resiliency actions that we can put in place to help affect that. And then lastly, where we're positioned and the fact that we're positioned in heavily in non-expansion states. We've talked about 60% of our revenue relates to non-expansion states, and that helps us out because the expansion states are the ones that are going to feel we think the effect of the work requirements and the supplemental payment reforms more so than non-expansion states, non-expansion states can keep a higher tax and they have a higher payment cap as well. So we continue to watch these things. But again, we think they're manageable for the reasons that I mentioned here before.

When we think about insurers, there's obviously been a lot of noise around denials. So what's your latest in seeing in terms of insurer denials and how is that impacting your business?

Yes. I'll take that. If you pull up a minute and just think about overall the work that we're trying to do with our payers, it really centers on creating more of a strategic partnership, if you will, with our payers. And what that looks like in terms of early phases here is to have more digital integration of data between the payers and between HCA. In essence, better and faster information flowing, clinical information, other information to the payers, which help them make their determinations around medical necessity and also around authorizations and such. We think it also is going to lower the administrative cost that HCA bears and that the payer bears in that whole process and maybe minimize some of the friction there. But to be sure, denials are increasing, not just for us but for the entire industry. I think what's really different, though, Michael, is our response, will HCA's response to those increasing denials. We have invested significantly in AI and digital capabilities on the rev cycle side, which we think largely have positively impacted and mitigated, to a large extent, the impact -- the financial impact of those increased denials on the company.

Going forward, how should we think about the commercial rate environment, negotiations going in light of the high-cost environment that's occurring right now?

Right. Well, certainly, there are pockets of cost pressures, most notably in the hospital-based physician segment of our P&L. And that said, we're working on those matters to a large extent. As I mentioned earlier, we're 90% contracted for 2026. We're about 1/3 contracted for 2027. And those contracts that have been finalized are coming in sort of in that single-digit range of increase, which is what we expected to see.

Perfect. Obviously, AI is coming up in every meeting and discussion with investors. Can you comment on how is the company benefiting from AI and kind of your thoughts about AI going forward and as a tool and what HCA is kind of how they are positioned with it?

Yes, sure. When I think about AI and our AI agenda, we think about it within the context of what it is that we do every day, which is to care for patients. And as I mentioned, we had 47 million patient encounters in 2025. And so we think there's large promise to the use of technology and AI and helping our teams eliminate the friction and helping them do what they do best, which is care for patients. We've made significant investments in our capabilities from a people standpoint, from a technology standpoint. We've developed some industry-leading capabilities in that arena. We use our hub hospitals, our innovation hub hospitals across the United States to pilot those innovations and then we scale those innovations across the enterprise. And when you have 45,000 doctors and you have 100,000 nurses, you don't scale those things necessarily overnight. Some of those take a little longer. Some of these are multiyear rollouts. But we think it has great promise for our organization to extract the embedded value that's in the organization, and we feel really good about where we are there and the investments that we've made.

Jon, I might also add, we think about our AI agenda across 3 domains. We think about the first one is administrative and what can we be doing on the administrative side, take the revenue cycle, for instance, and think about handling denials from payers and how do we respond to those denials, whether it's kickoff appeal letters or summarized medical records for our physicians to engage with our payers around certain claims. So that's the first is administrative. The second is operational, and we think about what are opportunities operationally. We've talked about what we're doing on predicting demand and then matching our staffing and scheduling to that demand is something that we've rolled out to a significant number of our hospitals. So that's on the operational side. And then finally, the final domain is the clinical domain and how do we think about making -- improving the ability -- our ability to deliver care. One of the things we're working on right now are shift handoffs for our nurses. These happen thousands of times a day across our enterprise. How do we make them more effective, more efficient, handoffs that happened so many times across our enterprise. So those are the 3 domains across which we think about our AI agenda and how we're trying to improve in advance there.

Perfect. So let's move over to labor. Can you talk about labor trends and how you view the outlook for inflation going forward?

Thanks, Michael. Well, certainly, we're in a much more stable labor environment than we saw with the challenges that we had during the pandemic era. And just to point to some metrics and some evidence of that, our turnover rates are down to really what they were pre-pandemic levels and our contract labor cost is also down significantly down to almost pre-pandemic levels. I think we ran 4.3% contract labor costs as a percent of salary, wages and benefits. So feeling good about where we are with that. On the physician front, I mentioned earlier, we do have some cost pressures there with -- particularly in hospital-based physician services. And we think we're going to see sort of high single-digit inflation pressure there on that line item.

Perfect. How about -- when you think about physician specialty fees, that's obviously been something very under the microscope. How are you viewing this line item going forward? And what's the latest?

Yes. Well, certainly an area of focus for us, and people may recall that several years ago, we acquired Valesco, which is a large physician platform, largely with ER physicians and hospitalist physicians that we're caring for our patients in many of our hospitals. We feel great about how that integration has gone. We feel great about the cost stabilization within that platform and really turning that into a strategic asset for HCA. When you think about all hospital-based physician services, not just what I mentioned there, there is obviously pressure there. And we're working on that. We have a number of different initiatives to deal with it. But think we're going to see sort of high single-digit growth in that particular area. People may remember that in this line item, that grew about 20% in '24 over '23. We brought that down to 10% in '25 versus '24, and we see single-digit growth -- high single-digit growth for that particular line item in 2026.

Okay. Let's move over to capital deployment. Can you discuss your strategy around capital deployment? And how should we think about share repos and how they might play into that as well?

Sure. Well, for us, our capital deployment starts with strong cash flow from operations. And we generated about $12.6 billion in 2025. We think we'll be between $12 billion and $13 billion in 2026. So strong cash flow from operations really gives us the flexibility to pursue what we believe is a very disciplined capital allocation program. It starts with capital expenditures. Jon has already touched on some of the opportunities that we see in our markets with over $7 billion in the pipeline for CapEx so that we can continue to grow our business both on the inpatient and the outpatient side. So that's the first area of focus from a capital deployment standpoint. We think about second M&A-related activity. You know over the last several years, we are spending a few hundred million dollars each year, acquiring facilities, be it inpatient. We've bought 2 hospitals last year or other complementary outpatient sites of care as we continue to build out the networks, as Jon has talked about. So M&A comes next. We'll continue to pay a reasonable dividend. You saw was declared by our Board of Directors in January in terms of growth in our dividend. And then lastly, we believe that share repurchase continues to be a very, very good use of our capital as well. We bought back about $10 billion in shares last year. You have seen that we have an authorization for another $10 billion from our Board this year, we anticipate, based on market conditions, completing a majority of that here in 2026. So we continue to see good opportunities to deploy capital. We'll continue to remain disciplined and we're fortunate because of the cash flow generation of the company that we have the ability to do that.

Perfect. So continue on when we think about your leverage, what is -- what do you think -- where are you comfortable with your leverage position? And how do you view the potential for M&A versus debt pay down?

Yes. So we feel comfortable about where we are and we've talked about we're more toward the low end of our stated leverage ratio. And of course, what that gives us is flexibility, and that's what we're looking for is flexibility in our capital deployment strategies, whether it's because we see incremental CapEx opportunities. I should have mentioned earlier, we spent $5 billion this last year. We're going to lift from $5 billion to $5.5 billion this next year. So it gives us flexibility there. It gives us flexibility from an M&A standpoint as well to the extent we see opportunities that we're able to move on inside of our markets or elsewhere. And then obviously, it gives us the flexibility from a share repurchase standpoint as well to be able to pursue that at levels that we did last year and then as we think about our authorization this year, as well. So certainly, our debt is something that our team manages very closely and very aware of but we continue to believe that the right deployment of capital for the company is the disciplined manner between CapEx, M&A, dividend and share repurchase as we've spoken to.

Perfect. I know you talked earlier about the DPP program. I don't remember, did you talk about specifically around the opportunity around -- obviously with Georgia's DPP approval last week. I don't know if there are any numbers around that. And then secondly, the read-in for Florida, I think there's some recent noise out today saying that Florida potentially got approved. I'm not sure if you're hearing anything about that specifically as well.

Yes. I touched on both earlier. I'll just reiterate, we're aware of the Georgia approval. We're not ready to size that yet. We'll do that as part of our first quarter call. On Florida, again, we have not seen a formal approval of the program. We know about ongoing discussions between the state and CMS. So we're aware of those conversations, but we haven't seen anything formal on Florida. And we'll, like I said, update on Florida and Georgia and any other states where we're awaiting these incremental approvals when we cover our first quarter call.

Perfect. Also, skipping around here. How should we be thinking about the impact of the rural hospital fund? That's something that's come up in conversation?

Yes. That's the $50 billion fund that was part of the [ OB3 ]. We have seen that states received a full allocation of that first $10 billion of benefit. Right now, we're just starting to get some visibility into what the states are funding and the opportunities that they're making available underneath the Rural Health Transformation Program. It's too early to say any kind of sizing we were clear in our guidance for this year that we didn't assume any benefit from that program. But as states start to make applications available, we'll have some better insight into exactly what the opportunities are for the company, and we'll be able to speak to those down the road. But we're monitoring it very closely in terms of what the opportunities are.

Another area of expenses. Obviously, there's been a lot going on in the macro market. Kind of how should we think about supply expenses given some of the macro-driven moving parts right now going forward?

Yes. So first of all, on supplies expense, I think we feel good about supplies expense being part of that relatively stable environment as we think about our guidance for 2026. But there are certainly several moving pieces out there. Certainly, there are geopolitical related items that are out there. There are also tariff-related items that are out there that could potentially have an impact from a supply expense standpoint. We're fortunate, as we've talked about in the past, we have a HealthTrust organization that has gotten a lot of experience in the last several years managing through a pandemic, managing through geopolitical dynamics that we've had in past years. And so being able to manage the supply chain through those dynamics and doing it in a cost-effective way, they have been successful at. The tariffs, obviously, we had the Supreme Court decision recently. It does seem like the administration will continue to look for other legal avenues to be able to impose tariffs. I think we're fortunate in terms of a lot of our supply expenses already locked down over 2/3 in terms of our pricing for 2026. So that gives us some protection. Where we buy our products from are largely in the U.S., Mexico and Canada. And so that helps us as well. So we think we're well positioned from a supply expense standpoint. And again, because of the strength of our HealthTrust organization, we think we're positioned to continue to be able to navigate any challenges that we see on the supply expense front.

We're running up to the clock here. I'll give you one chance. Is there anything that you guys would like to message to the investor community that is either misunderstood or underappreciated on an HCA story?

Well, I'm not sure that people always appreciate our scale, our shared services platforms and the competitive advantage that, that gives our local networks that we have across all of our different markets. So that has proven time and time and time again to be a benefit and to produce results for us. We've talked about supply expense. We've talked about labor expense. We've talked about rev cycle. So these are ways that really help us navigate sometimes some of the choppy waters that are out there. And I'm not sure that people always appreciate sort of that combination of very competitive local networks that are fueled by the capabilities of a national health system and how that combination really is a powerful combination.

That's great. Well, we are at time. I just want to thank you very much. I really appreciate the discussion today as I thought it was very insightful, and we appreciate your time.

Thank you.

Thank you.