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

HCA is the largest health system in the country. With us from the company, we're really pleased to have Sam Hazen, CEO; also on the stage of Frank Morgan from Investor Relations.Maybe to kick things off, it's been a pretty dynamic year, both for the company and kind of the space as a whole. Any kind of interest in maybe giving us kind of a brief state of the union perspective on demand environment, how you're thinking about your demand in your markets over maybe a bit of a longer time period?

Yes. I think clearly, Steve, thank you for having us. We are dealing with a unique year when it comes to policy implications. The enhanced premium tax credits, which we exited strongly 4 20, 25 expired, and it had a more pronounced impact on our business and on people than I think a lot of estimates of that were out there. So for us, that's been the biggest dynamic. I was trying to give some earlier groups some context around all of that. So through the first 6 months of this year, we've seen about 2.1 million adjusted admissions inside of HCA. The discussion has really revolved around 22,000 those 22,000 adjusted admissions that were the adjusted admissions that migrated from a fairly profitable situation inside of the exchanges to a completely loss situation now in an uninsured status has had the impact that we shared on our call. But setting all that aside, 99% of our business has performed as we expected and actually better than it did in 2025. So in the context of what's going on from a macro standpoint, you've got the policy implications that have been negative with respect to the enhanced premium tax credits, but actually, for us, this year, it's been positive when it comes to the 1 big beautiful bill and the fact that the supplemental payment programs and the grandfathering provisions have allowed certain states to get their funding for Medicaid to a higher level, and that's benefited us in 2026 and somewhat offset some of the challenges with the enhanced premium tax credit. But when you look more broadly at the business, our belief is that demand for health care, especially in our communities, because we're in the Southeast and the Southwest. And there's still this continued migration of people from the Northeast, Pacific Northwest, California, Midwest, to the Southeast and the Southwest gives us confidence that demand for health care is going to continue to grow. We have scored that in the 2% to 3%, and we think that's a reasonable scoring as we look to the future. So that's a really positive backdrop. The second piece, I would say, with respect to our company is that our ability to meet that demand with our strategy is getting better. We continue to add capabilities to our company with more outpatient facilities. We'll approach roughly 3,000 outpatient facilities broadly across the organization that are part of what we call the hospital ecosystem within each of our communities. That extension of our reach to make it more convenient for our patients and then creating the capacity downstream if they need acute care is allowing us to meet that demand. And we continue to see modest growth in our market share and as the markets continue to grow and as we get better at executing our network strategy, we think we can meet that demand even more effectively. And then the third piece of what's going on in our company is this set of initiatives that we have underpinned to enhance what I call the enterprise capabilities to support our networks. And what I mean by that is we have 1 system opportunity inside of HCA. And that is connecting the local systems that we have in Dallas or Denver or Miami to the national system. So we have a number of initiatives that are enterprise-oriented initiatives that we think are going to complement what our people do on the ground, what our facilities can provide and enhance their overall capabilities, make them safer for our patients, a better place to work for our physicians and employees and in a more efficient environment by leveraging our scale even more than we've done in the past. And I think for HCA, broadly, we are at the greatest inflection point with creating enterprise capabilities to support our individual networks in ways that we've never been able to do. Some of that is being enhanced artificial intelligence and what the digital tools can do for our business. Some of it is advantage by the global capability center that we put forward. And we're finding ways because of both of those to leverage our shared services platform even more than we've done in the past. And we think that's going to create value across a number of areas in the organization. So pretty exciting. And all that results in, I think, a tremendous amount of capital reduction in our company, our cash flow continues to grow and be very strong. And we have a lot of optionality to invest in the business and then also allocate to our capital allocation plan.

Okay. Well, fantastic. It's a great place to start. Lot to follow-up on there. I guess before we get into a little bit more of the financial discussion, I wanted to ask about a couple of organizational items that have come up more recently. I guess, first, recently announced the creation of the ambulatory operations group. So I'd love to hear a little bit how that fits into what you're talking about. And also a recent key promotion, Dr. Mike Lasser to Chief Clinical Officer. Maybe you could touch on both those points.

Sure. And I think both of those are really about some of the evolution that I just mentioned. -- as we've advanced our ambulatory network to the point again of roughly 3,000 physician clinics, urgent care centers, freestanding emergency rooms, ambulatory surgery centers even affiliates that are outside the HCA network. We've seen an opportunity to coalesce them into a more coordinated function. They do a pretty good job of integrating into each of our markets. but we see opportunities corporately to sort of pull them together, create some synergy, create some consistency in how we think about growing them on the upside, if you will, and have forward-facing growth strategies for each of the individual units and then tighter integration into the system downstream. And so Charles Grassley, who is moving from our East Florida division in Miami, is going to lead the ambulatory operations group and bring that together and then integrate again organizationally into some of the other corporate functions in ways that I think are going to create value for this large platform that we've built over the past few years. And we've added to that platform significantly this year. We just recently announced an urgent care center acquisition in Texas. We've done some other outpatient facility acquisitions across our networks this year. So we continue to add significantly to the ambulatory network. On the digital side, Mike Schlosser led our digital transformation and innovation agenda. His background he's in a neurosurgeon by training, went to MT and he started our digital agenda. But previously, he was 1 of our Chief Medical lasers for the national group, 1 of our hospitals in Nashville, neurosurgeon by training, as I mentioned. So over the last 2 or 3 years, he's been separated in building up digital capabilities. The holy grail for our AI agenda is inside, I'll call it, the clinical world. If we can make the work environment better for our patients, I mean, for our employees and for our physicians, then we can extend that broadly into patient safety, quality, more consistency eliminating unnecessary work. And so I felt it important that we integrate now that we've matured our digital thinking and capabilities into the clinical teams where when our clinical teams are talking, the digital people are in the room with them. When the digital team is talking, the clinical people are in the room with them. So that's going to create sort of organizational alignment, some synergies. We still have an opportunity administratively to do some digital things, and they'll own that as well. So those 2 realignments are really about just sort of the natural evolution of some key initiatives for the company.

Got it. Just to come back to, I guess, then the performance financially this year. When you look at -- obviously, the exchanges was always going to be a difficult item to kind of estimate accurately in real time. So understanding and kind of setting aside the revision that you made on the exchanges, and we'll talk a little bit about that in a minute and setting aside some of the changes on the Medicaid front. It looks like the core guidance has come down by about 3% with the revision you made with the second quarter. I guess how should we think about the key drivers of that? And what's played out perhaps differently on that core component of the business relative to the actual expectation?

Your definition of the core may be different than my definition of the core. I don't know how you're necessarily defining them. Let me speak to it this way. '24 and '25 were incredible years for our company. I think we grew almost double digits on sort of the business. Volumes were strong. Payer mix was strong. A number of things went our way, and our business performed really well. When we look at the business today and back to the 99%, it's performing pretty darn close to the high side of our long-term guidance of 4% to 6% EBITDA growth. And so I think from that standpoint, there's a lot of puts and takes. The service mix maybe hasn't been as great as we had hoped. There's some elective dynamics with consumer sentiment that maybe is playing into some of this. But our core business continues to perform really well. And as we think about the last half of the year, we have a pretty positive outlook on volume and demand growth, and that's really coming from how the last 4 months of the first half of the year performed. We're also encouraged by our financial resiliency agenda and how it's maturing. And so the growth that we see in sort of the core is pretty solid.

Okay. Got it. I appreciate that perspective. Obviously, there's been a lot of discussion around surgical trends, and that was like a big item for the company in the second quarter in particular. I guess, walk us through the major factors that are impacting surgical trends. You spoke a little bit about electives as you continue to study that issue? I guess what have you kind of seen around elective trends? And I guess, how are you thinking about sort of the surgical schedule as we sort of the coming quarters?

Well, I think the discussion that we talked about is connected heavily to the surgical discussion, and we called this out on our call, where most of our elective surgical declines were attributable to the HIX classification. So the HICS has been a bit crosscutting. And that's the lion's share of the decline. The second piece is a little bit of what we totally from our physicians, and that is that, hey, there's a hesitancy for some of our patients to want to go and get their surgery done. That may change as we push through the balance of the year, we don't know. And the hesitancy is generated mostly by this sentiment that maybe I should pause in an hurt that bad, can't afford it to the same degree I could in the past. So that's been a piece of it, a smaller piece a much smaller piece. And then the smallest piece has been the inpatient rule change where we've had a little bit of the Medicare inpatient-only rule affect surgery and then when it moves from inpatient to outpatient, it gets a little bit more diluted because there's more outpatient suppliers. And so we lose a little market share with that. So those are the 3 pieces that make up the surgery. Our guidance for the balance of the year does not consider a rebound in surgery. It sort of continues throughout the balance of the year. The main drivers of the HIX and these other 2 factors. It's possible that the consumer sentiment think could ease a little bit as people get to their deductibles and fund that in the fourth quarter, they can actually now it's a good time to do it. We'll have to see.

Okay. There's been some coverage recently have efforts to try to collect more upfront and establish payment for cost sharing upfront before procedures are actually done. As the company made any changes to how it approaches doing that. And I wonder if that could be something that might be exacerbated and what we're seeing?

We haven't really changed how we approach our patients with co-pays into dore pretty consistent method that we've used over the years. I mean that can get nuanced a little bit, but it's not at a quarter it's not having an influence on sort of the business trends.

Got it. And if we were to kind of look at the commercial business and set aside the exchanges, I mean, I think 1 of the highlights was that commercial ex exchange volume rebounded a good deal in the second quarter, kind of a big improvement. I know, obviously, this is going to bounce around from quarter-to-quarter. But I guess, how do you think about where employers are in your markets at this point in time from just a hiring and demand perspective?

Well, I think this goes back to the backdrop on demand Steve, when you look at this growth in the Southeastern parts in southwestern parts of the country, I think they're very overing economies. You have a lot of movement to these communities from the Northeast, Pacific Northwest and the Midwest, I continue to move actually more than we anticipated. We thought it would slow down a little bit post COVID but it hasn't. And so when I think about the commercial component of what's going on in that macro, we're optimistic that we're going to continue to see good job opportunities for people, continued coverage through employers and solid demand as a result of that for health care services.

And then when we think about some of the other market dynamics, obviously, gaining market share has been a big part of the company's long-term volume algorithm. I guess how would you describe competitive dynamics over the past couple of years? I mean, has there been any impact from kind of the upswing of Medicaid Supplemental Payments or potentially maybe 340B to some of your competitors?

I think we've gone through different cycles in our company with, I'll call them competitive cycles as we go through political cycles, recessionary cycles and so forth, expansion cycles, I think the competitive dynamic is there. There are some formidable competitors. They do have some resources that have come to them through these programs you mentioned. The markets perform well, stock market and a lot of them have large investments. So there's investments, capital spending by our competitors. I don't think we're getting outspent nor do I think we're losing position, but we have to be better. And that's what we've challenged our teams around is how do we get sharper at what we do. as a company, how do we support our networks with analytics with some of this reorganization that we talked about with Market Intelligence. So we've got new tools to get even sharper and I think we have a pathway to continue to grow market share. And we don't have to grow it that much to accomplish what we need to accomplish when we have demand naturally growing in our communities. And so I think from that standpoint, we're trying to sharpen our tools so that we can compete even more effectively. And our overall positioning continues to be strong.

Okay. And then when we think about the guidance, I won't ask this in terms of like a core EBITDA framing. But when we think about what the company has assumed in the back half guidance post the revision, I guess maybe you could help us understand how you're thinking about maybe the impact of resiliency in the balance of the year and maybe that's a greater contributor than it was in the first half of the year? And then broadly, how you're thinking about the level of demand and cost performance that needs to occur to deliver -- if you want to take that?

Yes, I'd say for the second half of the year, basically, the guidance assumes that as Sam mentioned earlier, surgical volumes remain about the same. Overall demand in the second half of the year is about the same. I think 1 thing you will see is the benefits of resiliency, certainly more so in the fourth quarter than the third. We talked about when we were updating our guidance that the growth rate in the fourth quarter year-over-year would be better than the growth rate year-over-year than the third quarter. And I think that's a reflection of the ultimate implementation in effect of some of these resiliency programs that really take traction.

Got it. And then maybe as part of that discussion, just obviously, we've seen, again, like the big issue with exchanges has been just kind of the lack of conversion to other forms of coverage. I guess when you now have a pretty good line of sight to where exchange volumes are in the second quarter, I guess how are you thinking about exchanges and where that goes in the back half of the year?

I think we assume attrition levels that's going to level out, and that's informed by years of history looking at attrition patterns amongst the HICS population. We have several years of data there. We looked at real-time data through the months of the second quarter. And we feel like the adjustments we've made here will accommodate that in our guidance range that we've laid out. So I would say that by the fourth quarter, we talk about this third versus fourth quarter dynamic, 1 of the benefits we'll see is we just mechanically have an easier comp in the fourth quarter of this year. If you look at the effects we think you started to see some of these negative effects actually starting occurring in the fourth quarter of last year. So basically, the comp should be a lot easier in the fourth quarter of this year versus prior.

And then to focus a little bit more on the exchange volume that still remains in the system. I mean 1 of the watch areas seems like it's really there's been a material shift, especially in some markets, the products that have higher deductibles cost sharing. Could you just elaborate a little bit on how the company has planned for this aspect of it? And in terms of collection time lines on these dollars, are you at the point now where you feel like you have good stability into how that's going to play out? Or is that still going to be something that takes some time to really to know for sure?

I think we are comfortable with our visibility into co-patient deductibles. It's -- it's been a bit of a pressure point to your comment there where people have lower co-pay and deductible responsibilities this year than they did last year, but they had more in '25 than they did in '24 also. So we don't know exactly how that's playing in an overall economic effect when it comes to consumers in general. I think our collection rates have been about the same as they've been in the past. So we work with our patients to get them coverage. We work with them to have payment terms that work. And I think we feel like we're doing the appropriate things there. But it has been a little bit of a pressure point through the first 6 months. That is factored into, as Frank alluded to, our guidance as we push through the balance of the year. Okay.