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

All right. Good afternoon. I know we're running a little late here. So our next presenter is HCA. With us today is company CFO, Mike Marks. Mike, thank you for doing this. Well, let's see. Since we're in Nashville, health care services capital, maybe let's start with how you view the state of the hospital industry especially as we consider things like the expiration of HICS, One Big Beautiful Bill, macro, demographic trends. I mean, people are always asking what does the hospital industry look like today?

Yes. I mean it's a dynamic environment for the industry on the hospital side for sure. And you've noted some of the biggest moving parts on the of the headwind side, we're kind of halfway through the end of second quarter, the first year of the reform to the exchanges with the expiration of the tax credits, enhanced tax credit. So that's the biggest moving part for, not just for HCA, but really for the industry as we sit here halfway through 2026. And then there's some positive aspects, too. I mean I think for the industry, I mean, certainly for HCA, the demand environment continues to be good. I mean, we are seeing overall strong demand, at least in our markets for health care services. And while the exchanges have had a payer mix dynamic under that where people are losing coverage on the exchanges and becoming uninsured. And so we're dealing with that pressure. The fundamentals of demand are still strong. I mean second quarter, and again, I'll use HCA as a proxy, but for second quarter, our insured business, excluding the exchanges were up 3.2% over prior year. And that is a good number when I think about our commercial business, our Medicare and Medicaid business, so demand is good. The policy framework is always such that there's some negative aspects and some positive aspects. In the One Big Beautiful Bill, I think the headlines are the SDP reform and work requirements. But part of this was grandfathering, and HCA was fortunate. We had 5 states, including one of our largest states that had this opportunity under the One Big Beautiful Bill to enhance our programs. And our states, those 5 states were able to execute on that. And so over the last 6 months here, we've seen all 5 states now move through to approval. And so the policy guides take us away and the policy guides give it. And then this one, it's a real benefit, and it's helping us navigate some of the negative headwind challenges. There are other aspects, I think longer term, the industry were starting to look at the reform of Medicaid under the One Being Beautiful Bill and how to navigate that. And then I think the whole industry is working through resiliency. And we certainly are, and we'll talk about that as we go through today. But that's the pace of play. It's a reform environment. It's a dynamic environment. And I think the stronger players are navigating through these challenges. But we'll -- then you got to get to specifics.

So let's get to specific then. No, more [ HD ] specific. So when we think about the second quarter, a lot of moving pieces to unpack a guidance change, softer surgical volumes. But on the flip side, I mean, you bought back a lot of stock. So when we think of the guidance for the back half of the year that you've laid out, how do you -- how do we put the pieces together to bridge us from what was first half into the back half of the year?

Yes. I think the -- if you think about the movement parts in our second half guidance that was implied, there's really 3 or 4 kind of key moving parts. I mean you've noted one, which is the update to our exchange impact. And based on what we've learned here through the first 6 months, we did update the negative impact to $1 billion to $1.2 billion based on what we've learned through the first half. So that's a big moving part. The second piece here would be the state supplement payments. I mean, with all the grandfathering applications that are now approved and with the pickup that we were able to record in second quarter related to Florida, we now believe that that's a $300 million to $500 million net benefit for the year, which is a positive thing. I think second quarter also highlighted the improvement in the volume story. In the first quarter, our volumes were disrupted a little bit with the winter storm and with the kind of sudden stop to the respiratory season. Second quarter pulled right back. I mean we saw 2.5% admission growth, 2.7% on the AA growth. And as I've already noted, good results on our insured book, excluding exchanges. So we were pleased in our overall guidance, and that includes our belief that, that volume growth will continue here through the back half of the year, and that's important. The other component really that's embedded in our guidance updates cost. And for second quarter, our resiliency plan produced a good output on our cost management efforts. And we believe, given the line of sight we have with resiliency and the actions that we're taking that will even be a bit stronger here in the back half of the year. And so as I think about the rest of the year, I'm really pleased with where we are and where we're going. But we also took the time to just realize where we were an adjusted guidance accordingly with those factors. And then we'll update you when third quarter comes.

So maybe if I may double-click on that, one of the questions we're getting asked a lot is the visibility into HICS, right? So you adjusted your guidance. So a lot of investors are asking, how comfortable or confident are you in that revised guidance range? And what gives you the visibility to say it's going to be $1.2 billion or $1.1 billion midpoint?

Well, I mean, what we did is what we always do. And given the dynamic nature of the exchanges, I mean, it's the biggest moving part that we have this year, as I've noted, we took what we've learned through the first 6 months. We made our best estimates for the back half of the year and then we set a range. And so we have this range of $1 billion to $1.2 billion. The only other thing I would note here is that there's a bit of a fourth quarter comparison factor here. And in hindsight, when you look back at fourth quarter of 2025, we were already starting to see some of the effects of reform. And I mean, one example of that would be the suspension of the special enrollment period for low-income people. And so fourth quarter of '25 was up only about 2.5% over prior year. The full year was over 10% growth in '25 versus '24. Even sequentially, I mean, typically, fourth quarter would be the peak of our exchange volumes out of the 4 quarters of the year. And then fourth quarter, '25, we actually saw 5,000 decline from third quarter to fourth quarter on equivalent admissions. So the slowdown started in fourth quarter of last year, and so that's a piece of the story in terms of our second half of '26 versus second half of '25. And then it's one of the reasons why we highlighted that we thought fourth quarter's growth rate would be a little better than third quarter, is this dynamic on year-over-year comparison on exchanges. But it's a dynamic moving part for us. And what we always try to do is give our best judgments and estimates based on what we've seen. And that's what we did in second.

No, that makes sense. And then, Mike, as we think about the payer mix, just excluding the HICS impact, what does that look like for you guys in terms of the durability of the growth rate in your Medicare book or Medicaid to some extent and then commercial?

Well, I mean, the payer mix dynamics through the first half of the year when you get through the first component, which is almost this one-for-one migration out of the exchanges to uninsured. And then we saw a little even more uninsured growth related to Medicaid conversion slows down, but that's been well documented. The rest of our kind of paying book, if you think about Medicare, Medicaid and commercial, it performed really well in the second quarter. And it's consistent with our overall thought pattern here around the macro of 2% to 3%, but we're pleased with what we're seeing, out of demand in our markets at the halfway point in the year. It was encouraging. I mean, coming after first quarter, the signal was a little diluted because of the respiratory season and winter storm. I know there was a lot of concerns from the investor community about, is demand really durable, especially commercial, excluding HICS? And I think second quarter answered that question well for us. And our expectation is that will continue, that's in our guidance update for the balance of the year.

So Mike, so maybe just to clarify that. So you feel good about the sustainability and durability of volumes outside of the payer mix challenges. Is that the right way to think about that?

It is. I mean if you go back to even our Investor Day in 2023, our long-term plan, which was based on a long run of compound annual growth rate analysis on admissions and adjusted admissions, we set that at 2% to 3% growth. And we've always said, like in any 1 year, it can be below that or above that, and '24 and 2025, were above that. right? But as we sit here through '26, I mean, I still think that, that 2% to 3% growth in equivalent admissions is a proven output from our work. I mean, our work to invest in our networks with capital investments and inorganic acquisitions, and then optimize that network over time. In our 43 markets in 19 states, I think, has proven our ability to grow volume in that 2% to 3% zone. And so that is the right marker for us for long-term to the volume growth. And I think our -- both our past trends and our investment profile, as we sit here today and as we forecast into the future, supports that.

Mike, last week, some of the med device manufacturers at a competing health care conference talked about softness or slower recovery and surgical volumes, especially ortho, I think, is what we heard. I know you don't comment intra-quarter on trends. But maybe if we can look at what the trends look were like exiting Q2 as it relates to maybe ortho procedures just in light of some of these comments that we're hearing from the device guys.

Well, let me just anchor on second quarter, let me do that. But as I think about second quarter for surgery volume, the big callout is really elective surgery. I mean our emergent surgery growth continues to be good and pretty consistent with our past trend, so it's elective. On the inpatient side of elective, and frankly, on the outpatient surgery side as well. The biggest issue is HICS. This movement out of HICS to uninsured, as people in our communities have lost coverage on the exchanges become uninsured, they generally lose access to elective care. And so you're seeing -- that is the primary driver of the slowdown in our elective surgery volumes is exchanges. The second component that I would call out would be the Medicare inpatient-only list. And for inpatient surgery for Medicare, we're in year 2 of a 3-year phase out. And for this year, the procedures that were most impacted were orthopedics and spine. So that is an aspect that we're seeing in Medicare that are moving more to outpatient this year because of the phaseout of the IPO. And then the third thing that -- and it's early, so this is still a bit of a hypothesis, but we believe that we're seeing some consumer sentiment on elective surgery. Given the economy, inflation, energy costs and the like. And so our early read is we think there could be some deferral of elective care right now that we saw in second quarter that also was maybe the third and the lesser of the 3 drivers I've mentioned on elective surgery.

Mike, when we think of the inpatient-only list, I mean, HCA owns a big network of ambulatory surgery centers, right? So maybe if you can just walk us through how to think of your strategy to take advantage of the IPO list?

Well, we are a hospital-centric network health care company. And so in our 43 markets, in our 19 states, we tried to build comprehensive health care networks in our markets. We'll have hospitals, including kind of hub hospitals for acuity and spoke hospitals out that play a community hospital role. And then we'll surround our hospitals with network assets. Think about urgent care centers and freestanding emergency rooms and ambulatory surgery centers and physician clinics, with the idea of making it easy and convenient for patients to access our network when they need low acuity care, and then as they need higher acuity care to make it seamless and convenient for them to access our acute care hospitals or our ambulatory surgery centers as they need it. And so surgery centers for us play a role within our network. They help us secure our surgeons, and they have an investment opportunity in our surgery centers and then they tend to work in our inpatient facilities when they need to do inpatient care. And as cases move, and they do from time to time, I mean we can go back to total joints as an example, as cases sometimes move from inpatient to outpatient, we have the facilities, the surgeon community and the access for patients at all levels of care. And so I think about surgery centers is playing that role for us in the market, and we do. We have a nice network of about 150 surgery centers around our markets, but they play a network role for us in market, which is a little different than some of the other hospital companies. But that's the role at place for us. And I think it helps us when cases do go through transitions like that, we have a place for them to go. And we tend to have a medical staff that's connected to us on the inpatient side and in the surgery center side to make it seamless.

That makes a lot of sense. Maybe just to the other point you made on consumer spend and consumer confidence macro, one of the things that we've always thought about with HCA is that you are in some very attractive economically positive or strong markets even. How does that all factor in as you think about the broader hospital industry's growth or performance versus yours?

Well, it helps us. I mean, the hardest thing to change about a hospital is a ZIP code. it's pretty hard. And so like once you enter a market, you're married. When it's not -- there's no easy divorce here. And so like having these 43 markets that are mostly in the Southeast and the Southwest components of the United States, our markets tend to have higher-than-average population growth. They tend to have stronger economic performance, higher levels of employee-sponsored insurance coverage. So these are really good markets that we like. And so that, by definition, is helpful to us in both demand and payer mix over time. But if I think about 60% of our states are in non-expansion states, right? And so in today's world, what that means is that we have a little bit more exposure to the health care exchanges than some of the other markets that were more expansion-oriented. And so that's a factor but broadly speaking, I mean, I think patients are experiencing this -- a little bit of this consumer sentiment right now because of the factors we mentioned earlier, the cost of insurance premiums, the energy costs and the like. So what we're seeing this year is that our patients are owing a little bit more from benefit design, on employee-sponsored insurance, even a little bit on Medicare Advantage and then certainly on the exchanges. There's a bit of movement from silver to bronze and they're owing more. At the same time, given the economy, they're not paying us more. And so it's one of the pressure points this year is that we've seen a little bit of slowdown in our ability to collect out-of-pocket amounts due and they owe a little bit more. So it's part of what we think consumer sentiment is having an effect on us. Now we're navigating that. I wouldn't call that a really significant impact, but it's not nothing. And I think that's the piece that we're highlighting on our second quarter call.