Sure, I have a whole lot to add to that.
Look, I thought the Investor Day was incredible, and especially, you know, the next generation of leadership there.
Yeah.
Your division president, COO, was it Mike Marks?
Yeah.
It looks like Bill Rutherford.
Solid. He's solid, yeah.
He certainly looks like maybe the next generation, so.
Well, our goal was to give people some appreciation of the depth of HCA-
Sure
... and the capabilities that we've developed over the decades. So hopefully, you got a look into that. Secondarily, give them insight into the depth of the management team, and then probably just as importantly, share with, you know, the investors our outlook-
Right
... on various aspects of our business, especially in a post-COVID environment.
Right.
Hopefully, you know, we accomplished those three primary objectives.
Yeah, there was, and tell me if I'm wrong, but you know, my impression and the feedback I've gotten from investors, there wasn't a lot of change, right? You're gonna take market share, you know, you're gonna keep running a fairly similar playbook. You know, roll out more outpatient, more in my, you know-
Yeah
... continue the out, you know, the in-migration of high-acuity services, right? And, you know, it was more kind of showing us how you continue to get.
I think that's right.
Would that be a fair-
I think that's right. You know, and we think if you look at the 10-year value creation over that time-
Yeah
... it's been a pretty good formula for value creation. Combine our operational performance with capital allocation, invest into the business, being able to, you know, establish our networks as important community assets. It's, it's a formula that works, and we're gonna stick to it.
Good. Look, the... I'd say the, you know, a couple of things I came out of the Investor Day wanting a little bit more of is probably more around the near term.
Yep, I understand.
Right? You know, you and I have been talking for 20 years, and you know, I do feel like, you know, usually, Bill, you know, at least in the first 18 or so, it felt like more of the pressures were up, like, when something would be off, that typical trajectory. It was all for, you know, a period of time. Company did an amazing job of kind of reacting, but typically the off was on the revenue, in my mind. It was more, you know, did volumes moderate a bit? Did payer mix change a bit? It feels like it's different, you know, all of that feels pretty good, and it's now on the cost side.
Right.
So, you know, the latest cost issues are, you know, labor and now transitioning to professional fees. So maybe you could just give us an update there. Like, my recollection on labor was that we really saw a, you know, first we saw a big temp labor, you know, kind of, get out of hand.
Yeah.
Company did a very good job of getting its hands around that quickly, right? The industry as always. But had to make investments in the existing labor.
Yeah.
Right? And I think in the... it was maybe second and the third quarter, where you started-
Sure
... kind of ramping those.
Absolutely.
So we annualized them in 2023, and I think we started seeing some of that. Do we, you know, what do you think the, when you think about your 2024 expectations, what do you think about for labor relative to the typical 2%-3% range? Does labor kind of start to get back to that trajectory, or is it still elevated?
I think labor, if I all in or SWB-
SWB
... or salary, wages, and benefits, I think returns to our historical trend. You know, to your point, the labor market, the clinical labor market in particular, was disrupted during COVID. Just all the supply and demand that affected as people moved into these temporary agencies. We had to have the nurse to meet these COVID surges, and inflation escalated through the utilization of premium labor. And to your point, that was an area we focused on, and then within a couple of quarters, we were able to moderate. And by the second half of 2022, we were in a pretty good spot, and that's continued through the course of 2023. So I think overall, the labor market has settled significantly since that point in time. Turnover is back to nearing pre-COVID levels.
Our recruitment is providing, you know, I think, adequate amount of staff. So I think overall, I got asked a question during Investor Day. Overall, 2.5%-3% is a pretty good planning horizon for us, for the most part. And then, you know, obviously, the current day is the professional fees-
Uh
... on there, and just we, as a management team, feel confident we'll continue to mitigate that and make inroads on it, just as we have other issues in the past. We've got a number of initiatives underway. I can't give you an exact 24 landing spot for that till we go through our planning process, but we have every expectation we'll continue to see improvements sequentially in the rate of growth of those physician efforts. Not only through utilizing scaled platforms, but to try to make some programmatic changes. And we're not sitting still on that. In my experience, anytime as a company, we focused on, you know, addressing a particular cyclical challenge, we do a reasonably good job of getting after it.
I, I couldn't agree more.
Yeah.
So when you say the rate of growth improves sequentially-
Yeah
... remind me, what was it 1 Q to 2 Q and 2 Q to 3 Q?
So, Q3 to Q2, our rate of growth, I think, was down around 5% sequentially. I think we were seeing mid-teens in the Q2 level, so it kind of peaked on us. And so, you know, I don't know where it's gonna settle in at. I can't call an exact number, but I think our pro fees, we've stated, are up about 20% year-over-year, on there, and we have full expectations that won't be the case next year.
Right. So, it seems to me the expectation should be just the annualization of that big pickup in 2Q-
Yeah.
and then further pickup in 3Q, even as that moderates, that's gonna be a headwind next year.
A little bit.
It might not be up 20% year-over-year-
Yeah.
But it's gonna be up, you know, materially more than 2%-3%.
Yeah, potentially. Yeah. I think I can't escape that. Clearly, we're gonna have a year-over-year tail effect of that. But we have a number of initiatives underway, not only on pro fees, but other efficiency initiatives that, you know, we're confident in kind of the broad kind of range of targeted expectations we gave. So, were you not? Nobody hearing me?
I was not mic'd up.
Okay.
I think I can project out.
I think they probably picked up on there. Sounded fine. So, yes, our overall goal is to keep those growth within revenue growth.
Mm-hmm.
If it grows a little above revenue growth, then we're gonna find initiatives or other initiatives to offset that.
Right. So for instance, you talked about, and, forgive me, I think it was maybe $600 million-$750 million or $700 million-$800 million, during, I think it was, Mike Marks' presentation on-
On a lot of notice.
Yeah.
Yeah.
Um, so-
Efficiencies.
Yeah.
Efficiencies being driven, $600 million-$800 million, over the next five years. Yeah.
So should we just divide by five and think about that as-
No, I don't think it's as easy as that. It's, it's kinda gonna ramp up-
Right
... as these programs develop and mature. Some of them, as he talked about, are, you know, depend on some of our technology and innovation initiatives, as we can operate our facilities in a much more efficient. But they're already beginning. They've been part of our success going forward. We also said we see opportunities to drive efficiencies and outcomes through our technology investments, and we're committing a significant amount of resources to our technology over the next few years. And our resiliency efforts, our efficiency efforts, will largely pay for those investments in the early years, and I think provide meaningful contribution in the out years. It's not as easy as straight-lining them, but they'll start providing meaningful benefit to us in the near term.
Got it. One of the areas that, you know, was a benefit in the third quarter was these Medicaid DPP payments, right?
Yes. Yeah.
And, you know, as I think you know, we met with a friend of yours, David Dill, down in, in Nashville, before your Investor Day. He's the CEO of LifePoint, and he mentioned to us that there's a pretty big check coming his way from North Carolina, right? And I think I asked you this at the Investor Day, right, is that in the guidance? So first of all, the North Carolina-
It is.
And-
In our 23 guides.
Right.
Yeah.
North Carolina-
And 24.
24.
Yeah. Yeah.
And, Nevada plus North Carolina recurring, I assume-
Yeah
is in 2024.
Yeah.
Okay.
In the range of our expectations.
Got it.
A lot of these programs, you think, are just part of our operations right now. There are some new states coming in. To your point, North Carolina, Nevada, as I understand, is not approved yet. We typically wait for those programs to be approved and for funds to start flowing before we start recognizing them. So I don't have an exact timeline on when Nevada, but I do think it's a 2024 event for us.
And just, you know, I tried to put some numbers around it, and all I want you to do is sanity check it for me, right? I'm not looking for an exact dollar amount.
All right.
But, you know, David Dill said $50 million, and you guys are more than twice as big as he is, right? Now, I know he's got more Medicaid. And then, Steve Filton said $100 million-$150 million, and I know they're a little bigger than you in Vegas. So I kinda told investors, you know, the, it's like probably $75 million-$100 million for each state. Anything you would just wave me on in those numbers? You know, am I way too, way too high?
We haven't sized it. That's a good answer. We haven't sized it yet.
Right.
But your sanity-
I want you up here.
Yes, that's a good answer. That's a good... You're still sane today. How about that?
Okay.
How about that?
Thank you.
That's it.
That's all I wanted.
Is that fair? Can I use-
Not too, not too often that someone doesn't tell me I'm wrong. So that's, that's very kind of you.
Yeah.
All right. So then, you know, just thinking about the potential there going forward, right? These things are impossible to forecast, right?
Yeah.
In terms of new states. But you have them in Texas, I believe, in Florida, now North Carolina, Nevada. Which states aren't they in? For instance, one of your peers mentioned Tennessee as a place where it doesn't exist today, at least not to the, you know, to the extent that it does in others, and that's a potential, you know, an area of lobbying for 2024.
I think every state has a little nuance to how their program works and so forth. And I think Tennessee has an existing program. I think we've heard some discussion there may be some expansion to that. I don't really have any further insight into that. But if you take our footprint, you know, some of those states have Medicaid expansion, which is kind of their process, is an effort to gain more Medicaid funding. Some have used the 1115 waiver programs for years, like Texas. Some have used some of these new directed payment programs, all to basically supplement Medicaid and uncompensated care funding on there. So I think most states have some form of that to a degree or another. Some may be expanding, like North Carolina, Nevada, and I think those are...
I think that's substantially the majority of the states that we're in.
Got it. And when you say expanding, like North Carolina and Nevada-
Mm-hmm.
My understanding is that, you know, the historically, these programs were, you know, you're getting massively underpaid on Medicaid, right?
Exactly.
Everyone loses money on Medicaid.
Yeah.
They're trying to get you, like, you know, in the ballpark of Medicare rates, right? Or, you know, somewhere-
Somewhere in there.
in that range.
Yeah.
Some of these new programs are pushing, trying to push you closer to commercial rates, right? That's my understanding. Is that, is that the way you view Nevada and North Carolina?
I've heard that with Nevada. I don't have exact knowledge on that yet, but yes, I've heard some will be in that neighborhood.
Okay.
I don't know, I don't think North Carolina necessarily is there yet. But I think that your premise is right. I think these programs are designed to help make up for what's historically been shortfall of Medicaid funding.
Yeah.
to one degree or another. I think each state has a little bit different approach to how they do that, and maybe a little bit different targets of what they're trying to achieve with.
Got it. So to your point, I guess just to add one more layer, right? Every state has these, right? It would seem to me like the right side of the curve would be to move toward trying to get you to commercial, right?
We would like to.
And for other areas that you're losing money in, like uncompensated care. So, you know, do you feel like, you know, Florida and Texas have kind of pushed to that, to that extent? Or is this more Nevada feels like an outlier?
Yeah. I don't know is my honest answer, but I don't think Florida or Texas are necessarily geared to necessarily try to do that. There's a lot of complications and a lot of variation about how these programs work. There's generally a funding pool. There's generally some limits. You know, there's an allocation methodology that each state has a little different. All of them are subject to CMS approval. So I'm hesitant to categorize them a broad brush because each state has a little different structure and a little different objective I think they're trying to accomplish.
Got it. Just the, as we think ahead, right, my assumption is, you know, a Democratic administration that's, you know, you know, trying to add more coverage, trying to get more access to care, might be a little bit more open to these types of programs than Republicans at CMS, you know, running CMS. Has that historically been the, you know, the, your, your experience?
I think traditionally, that was right, especially when you think about the early days of the Affordable Care Act-
Yeah.
and the intention of expanding Medicaid through maybe different mechanisms, and maybe these states, in lieu of expansion, have used these other programs in place.
Right.
But the programs are so important now to the broader provider community. They're always subject to some adjustment, I understand, but, you know, they're a large part of the funding mechanism to a lot of community-based hospitals.
Right.
So you think even if there was an administrative focus to try to adjust those to some degree, there'd have to be some compensation somewhere else to not put a major issue into the safety net of community hospitals across these different communities. So it tends to maybe buffer a little bit of the risk that may be out there-
Right.
in the event they, they get a little more.
Got it. And when you see that scrutiny historically on any of these programs, does it usually result in a potential decline? Like, do we have, do we worry if, you know, there's a Republican in the White House that, you know, they cut back on them? Or, you know, my history with, you know, the government is they're usually, you know, loath to take anything away.
Yeah.
So is it, you know, do you think more of the risk is just, you know, they'll get a little bit more scrutiny on the next one, or do you think there's some risk to the existing program?
Oh, I think it's the next one. I think it'd be hard-pressed to do anything retroactively on approved program, but that's my take.
Right.
You know, someone may have another one, but I think definitely it would be a go-forward scrutiny versus.
Got it. You know, one of the things that, you know, has been a real positive for the company has been, you know, beyond the acuity changes that you've had on pricing, right? And I know some of that's the market and, you know, sites of care, and some of that's all the great investment that you're doing, right, that you kind of highlighted at the Investor Day. But payer mix has been, you know, trending in the right direction.
It has, yeah.
And so can you walk us through what you think is happening there? Do you think that's part- do you think you're getting better share growth on the commercial side? Or do you feel like it's just, you know, the mix that's out there, and we're getting our fair share of it?
I think there's a number of factors that are driving it. And we've been pleased with those trends. I think it starts with the macro environment we're in was better than we probably anticipated going into the year. We're still in our markets in a very strong economy, almost record low unemployment in a lot of places, and still strong employer-sponsored coverage. And that fundamentally I think is a positive driver for us, and that was supported with strong enrollment in health insurance exchanges with the enhanced subsidies. So those two factors are really important to the payer mix here. I think we continue to capture share and position the HCA market, the network, to be competitive in the market. So that's part of the equation on there. Some of our expansion of service lines on there and our network development.
You know, a lot of our outpatient network development is, you know, gives you access to those lives. And so I think it's hard to call out any one of those as better or worse than the other, but I think the combination of those factors has led us to be in a pretty strong payer mix environment. And in our view, you know, I've said this before, you know, it's one thing looking at mix, a percentage of, but we're seeing strong growth in the commercial segment. We're seeing good growth in the Medicare segment. And as long as both of them are growing, one may be growing faster than the other, that may change a mix number, but as long as we continue to see reasonably good growth in both of those segments, both of them, I think, contribute positively to us.
Got it. So let's drill down on the exchanges for a minute.
Yeah.
Maybe you can talk about the percentage of your volumes, right, percentage of your commercial volumes that are coming from exchange enrollment, individual enrollment, programs today versus, you know, pre-COVID.
I think right now, check me on that, we're 4.5, 4 to 5% of our total volume is exchanges. Pre-COVID, it was probably 3, somewhere around that number, I think is about right. So still a relatively small piece of our total business, but it's contributed nicely to the commercial growth on there. And I think those are in the neighborhood, those are right.
How are you thinking about that into, into next year, right? There's, you know, there was a huge amount of enrollment growth this year, as the subsidies kind of-
Yeah
You know, fully went into effect during open enrollment period.
Yeah.
Now we've got redeterminations with big subsidies out there. You know, some people are calling for, you know, another strong year of growth. You know, how are you guys thinking about that for, for 20...?
I don't have a specific assumption on that one line on them, but I think it's our belief the exchange activity and the enrollment will outpace averages for all the reasons that, that you talked about. I think there's good subsidies in the market. We are seeing Medicaid redeterminations occur. It's still early. I don't-- hasn't been materially positive or negative yet, but I, I think incrementally, you may find people who got disenrolled in Medicaid find subsidies in the exchanges that will contribute to that. So I think it will continue to be better than average trends for us. I don't know if it will reach what we've seen this year, but it should be positive for us.
Got it. You know, how have the programs that you've put in place, I assume you've put in place programs to help people get coverage, right? I mean, that's different historically-
Yes
been helping people get Medicaid or get re-enrolled in Medicaid, right? I assume now there's also, you know, the exchanges, right? So get them enrolled in the exchanges.
Yep, 100%.
Show them those subsidies. What have you put in place there, and how successful have they been?
So early on, we did a number of things. Historically, we've always had what we call this, Medicaid eligibility or application counselor. So if you were at one of our facilities, you were uninsured, then we would work with you to find appropriate coverage for you. So we have a very robust operations underneath our Parallon organization that works with that. At different times, and we did this with the beginning of redeterminations, we would make outreach efforts. So we made a number of outreach efforts for people we've seen with Medicaid coverage and let them know we were a resource for them. We also helped them direct if there were community resources they could apply for or go for. So we did a lot of outreach early on.
I don't know how productive those were, but we've emailed and reached out to every one of our Medicaid patients that we've seen over 2 years and gave them some, you know, opportunity to be in touch with us and other community resources. There are several communities we've partnered with others. In the early days of the Affordable Care Act, there were these mostly not-for-profit entities that would help the communities gain access to certified counselors to go through eligibility. We did that where there were community resources, but I'd say the majority of our efforts were in our internal organization, through our Medicaid eligibility, that when you show up, we'll assist you in filling out applications and paperwork and exploring coverage options for you.
I assume your 2024 guidance, you know, the... I know you haven't officially given it, but that 4%-6% growth minus, you know, the one-timer-
Yeah
doesn't include much benefit or any benefit from redeterminations?
I think that's fair. It's basically a push. We don't have any positive or negative built into that is fair.
You know, I'm sure you've done your own work. We published something-
Yeah
A year ago that looked at that pretty in-depth. What has your own work told you about that? Should it lean to the positive, materially positive?
I think it should. You know, it's still early. We, third quarter was kind of the first quarter we did see some people show up that were uninsured, that previously had Medicaid coverage. The one thing that was surprising to me at least, is we're seeing about two-thirds of those were able to re-enroll into Medicaid, that they were disenrolled, maybe more for a technical reason. They didn't fill out an application, some level of paperwork. So once we go through our eligibility process, we're seeing a larger number of those actually continue coverage on the Medicaid. We are seeing some of those return with either employer-sponsored coverage or exchanges, but the numbers are still too small to draw any broader conclusions on. I, especially after reading your report last year, hopeful it would be a positive contributor for us, and I still think there's an avenue there.
I don't yet seen a material number at this stage, but we're working on every avenue we can to help people find appropriate coverage if they do find themselves disenrolled.
We know Medicaid can be retroactive, so you can get paid for that visit. If you get somebody signed up on the exchanges, the other third, who don't get re-enrolled, and you get them signed up on the exchanges, you don't get paid for that visit at the moment, right?
My understanding, there is a 90-day window period. Post your disenrollment, if we can get you enrolled in that 90 day, it would be retro.
Even if you move over to the exchanges-
That's my understanding. I may be wrong on that. I'll qualify it, but for others, you're right. We wouldn't be paid for that encounter. It would, it would be-
Next time.
Be next time. I think you're right.
Got it. And typically, an exchange member, just to kind of level set, what kind of compensation you get there. We talked about in our report, you know, the way I've always thought about it is, you know, Medicare pays $1, let's say, right? They're 100%. Medicaid pays, you know, 60-70 cents, and commercial pays... employer pays, like, $2.50, and somewhere in between $1 and $2.50 is where kind of exchanges sit, right? Not as good as commercial, but better than Medicare. Is that, is that kind of still-
Yeah, you're in the neighborhood with that. With the only qualifier, in some states, with the supplemental programs, the gap on Medicaid's improved.
Right.
Isn't as great, you know, they're getting closer to Medicare.
Picking up-
So you're not, you don't have the net net as much as maybe you would have historically believed you did.
... So let's stay on pricing there for a minute then. You know, the commercial improvement that we've seen, right? To reflect some of the inflationary pressures, right? It's a lagging, you know, it's a lagging event. But, you know, and remind me if, or tell me if I'm wrong, but my recollection was you were at 3%-4% before the inflation.
Yep.
Now you're getting more mid-single digits, 5, 6.
Mid-single digits.
Okay.
Yeah.
North of five or below?
Mid-single digits. Ah, good try.
You gave me the DPP number. I appreciate it. Okay,
No, I didn't. I just gut checked you. I didn't give you... Just for the record, I did not give you the-
You did not. Okay. All right. So-
So I get your point. Yeah.
So you're in the mid-single digits now. One of the things I've tried to think about is your contracts are, you know, typically 3 years in nature, right?
2-3 years. Yes.
Okay. So if you're getting—you know, let's just say mid-single digits, that's mid-single digits on new contracts?
Yes.
Or is that mid-single digit yields on average?
On new contracts.
On new contracts.
So the way, and we've talked with other groups, so if we began that process, say, middle of 2022. At that point in time, maybe two-thirds of the book was under old rates, a third under new. So the book blended up incrementally.
Right.
You know, we're basically 70% contracted for next year, we've said. Maybe a little more than that at this point, with maybe two-thirds of that under new rates, a third lingering at old rates. And then going forward, hopefully, after that period, most of the book has been contracted under, under new rates. So the book blends itself up based on that staggered timeline.
In 2023, you had a third of the book get repriced-
I'm saying broadly speaking.
Broadly. '2024, you'll be at two-thirds. '2025, you'll be fully-
That's broad, broad way to think.
Mid-single digits.
Broad way to think about it.
Okay. And the other thing I was trying, and I asked this at the investor day, but I didn't want to ask, you know, the follow-up or two, so let me do it now. You know, at the investor day, I said, "Look, you know, the, if you're signing a three-year contract, if you're getting mid-single digits on average, is that just the first year, or is that mid-single digits on average for the three years?
Each contract varies. All of our contracts will have an annual inflator after the first year. I think I can tell you, generally, the annual inflator isn't as much as the first-year step-up, but there's still inflators in those year two and year three that we've factored into our thinking.
I'm just saying, are they above the typical 3-4 that we were seeing? Or... 'cause, like, in my mind, either, you know, you're gonna keep ramping up, or if they go back to 3-4, you're gonna kinda stay at this level and kinda annualize.
All of them vary. Some are above that, some are in that number. As it averages, I'd say probably at the higher end of the range you just said.
Okay. So the net net is our commercial rates yields on the total book should improve, should improve in 2023, will improve further in 2024, and will improve further in 2025.
That's fair direction.
Okay.
Yes.
That's, that's really helpful.
Fair direction.
You know, any thoughts on, you know, the one of the questions I get is just the, you know, the volumes have been pretty good year to date, right? Better than the typical 2%-3%. How does that... You know, how do you think about that from a comparison perspective next year?
It's a great question. I mean, our volume profiles outperformed our original expectations going into the year, with typically 2%-3% on equivalent admissions. I think we're running 5% year to date. And so as we go into next year, as I said, we haven't finished our budgeting, we're still early in our process. Our planning horizon right now suggests we're gonna beat this 2%-3% number. But we kind of assess the macro environment, and there's still a lot of positive. We're, like I said earlier, in really strong economy, good employment. We think our investments to continue to invest in our networks position us well to capture share. So we do everything to try to maximize our opportunities in that effort.
But from a planning horizon over the long run, we still think 2%-3% is a good number. And when we conclude our 2024 budget and talk to you in January, we'll refine that a little tighter, but I still think there's good volume patterns there for us to capture.
Got it. One of the things that I noticed from a modeling perspective at the investor day was, you know, the 4%-6% was not a surprise, right? That's what you've been saying over time. I think that's what everyone expected going into it. You gave an EPS number that was 8-12.
Yes.
Was that the first time you've ever given a long-term EPS target?
In my tenure, yeah, I think it is. I think that's right.
So what-
We wanted to highlight the capital leverage-
Uh-huh.
of HCA between EBITDA growth or operational growth and our earnings per share growth.
Right. So the two things I think about, like, you know, just one sentence, it felt a little bit on the light side relative to what I think of as a normal model, right? If you're growing 5%, just the midpoint.
Yeah.
Right? In my model, just the fact that, you know, if I don't have interest expense going up, right, just kinda keep your debt relatively flat, you get some leverage off of that.
Mm-hmm.
Right? So typically, 5% would get me to, like, seven on the EPS line before you deploy any capital, right? So if we think about then the, you know, $1 billion a quarter of free cash flow and, and, and share repurchase, it'd probably get me to the higher end of that range, not the lower end. So I'm wondering if there's anything I'm missing there, and then, you know, talk to us a little bit about capital.
The only thing in that is, it's a math equation. Here's the way I think about it. If you look at our 10-year average, we've grown EBITDA at 6%, EPS just under 15%. So it's been kind of that spread.
Uh-huh.
Now we're growing, you know, 2x, 4-6 goes to 8-12 on there. The only real differential is you don't get the same share count reduction or our share repurchase as we've historically done. There's not as many shares coming out, but it's still, to me, a very positive story in terms of that kind of way I think about this 2-to-1 leverage between the operational performance and the earnings, earnings per share side. Maybe not quite as much as historically, but in our model is, if you project continued growing share price, free cash flow doesn't take out as many as the actual share count. That's the only differential in there.
I think we all expect you to grow free cash flow as well.
Yeah, we do. Just won't be at the same, same level.
Won't be at the same level. And then, you know, your CapEx is approaching $5 billion, and, you know, one of the things I think people appreciate the most is the discipline there, the returns that you continue to drive-
Mm-hmm.
despite, you know, much higher CapEx levels than you had, you know.
Yeah.
5-7 years ago. Talk to us a little bit about how much of that is, you know, the growth CapEx that you expect to get that return on, versus, you know, keeping paint on the walls, so to speak.
Yeah.
That, you know, is it really gonna generate a return? You just kinda have to be doing?
In broad brush, historically, it's been 50/50. You know, I'd say going forward, it may be more 60% growth, 40% retain, as the growth of the capital spending has been dedicated to growth programs on there. And the retain, to your point, we've got to keep facilities up to date. You've got to replace equipment, and so forth. We've got to invest in technology that by itself doesn't provide as a distinct return as our growth programs. And of that growth capital, the dollar per, a high percentage of that's going to inpatient capacity, so some of those are long-lived assets of long-lived projects that come on place. Then you go into our network expansion, building out our outpatient setting, freestanding ED, surgery centers, outpatient diagnostic.
And then the third area goes really more around program investments, maybe expanding robotics, maybe, expanding emergency room departments or surgical suites on the line. But I think going forward, you can think maybe 60% growth, 40% retain is, is, is a fair assumption for us.
Got it. You know, one of the things, talking about your outpatient investments, I think you said you had 12 outpatient sites per hospital-
Yep.
-growing to 20 per 20 over time.
Yep.
Was there a time period where you kind of were talking there that I missed? Where do you, when do you expect to get to 20 per hospital?
I'd say it's 5-7 years, would be, was kind of our planning horizon we're talking about, anything between now and the end of the decade, however you want to characterize it. If I go back about 5 or 6 years ago from today, the number we have is about 7, 5, 6-7 outpatient settings. So you can kind of see that trajectory over a 5-year period of time. So I'd say 5 years is a good planning horizon for us. It may vary market by market, but I think we said that as just an indication of the opportunities we see to continue just to expand the network footprint in the markets that we're in, as our geographies grow.
Many of those, you know, we can put a freestanding ED, an outpatient setting in a growing part of a market, and then as that market grows, we can expand our services like we have with actually building hospitals on a couple of those. So, yeah, 5-7 years is, I think, a good planning horizon for that step.
One of the things I thought you might talk about at the investor day that we didn't hear was, you know, the percentage of your revenue, the percentage of your earnings that happen outside of the four walls of the hospital. As you make these investments, right, you know, other companies kind of highlight that. You know, if you think about your ASC footprint, and your, and I think it's underappreciated, right?
Yeah.
The existing hospital footprint that you have. Anything you could share with us there in terms of, you know, maybe the growth profile of that, in terms of the perspective, you know, where we start today, what's the growth profile, and maybe even the margin, you know, what the impact on margin is from that growth?
Well, if you break that down, I mean, still, we're hospital-centric, and, and the related outpatients that are tied-
Sure
To that hospital, your outpatient surgery, your ED, your diagnostic on there.
Right.
So then, if you think if you're off campus, it's kinda your surgery center, your ambulatory surgery centers, which we've got 145-150 surgery centers in there. Pretty significant part of our business, and we view its value added over our network. You have your urgent care footprint. It's got a revenue profile. You got your outpatient diagnostic, but most of ours roll up underneath our hospital revenue profile as our departments of our hospital. And then you have your physician footprint, your, your physician clinics that you, that you have on there. We believe the value is in the network-
Right
-and the synergies of operating as a network, and those other, and the majority of the revenues in that hospital-centric effort. So we haven't broken out those revenues specifically. I can do that for you. I don't want to do it necessarily on the fly.
Right.
But, those would be the other components-
Right
Outside of our hospital, would be your surgery centers, your urgent care, and your physician clinic. But by far, the majority of our revenue is in that hospital campus and the related activities.
The last thing I want to touch on is, you know, the margin targets of the company, right?
Yeah.
You know, that's kind of where I focused on your stock, right? When I've seen the business over time have a hiccup, whether it's, you know, on the cost side or the revenue side, you know, I, I'm not able to build a bridge from year to year, right? Because I don't know what you're doing underneath the hood. I just know that you're doing it, right? That's, that's been the history of this management. So as you think about that 19%-20%, right, going into next year and beyond, one of the things that, you know, I look at is saying maybe, you know, it could change, and this would moderate it a bit, is something like Valesco. So let's talk about that for a second.
The Valesco piece is, you know, it sounds like it's $8 billion of cost and $800 million of revenue… Right? So that's just gonna be a natural 20-30 basis point drag on margin, right?
Until we improve it.
Until you improve it. So what is the, you know, what is your ability, as you think about, I assume 2024 doesn't assume any improvement, right? It assumes that-
No, I'm not gonna say that yet.
Okay.
I wanna go through our planning process, and we'll give you our 2024. We're working diligently to make efforts on that. And I don't wanna give you a number yet, 'cause we haven't finished our planning, but we have every expectation we will improve that. I can't put a degree on it for you yet. We will, hopefully, in January call and bracket it, but we're working very diligently to try to improve that run rate.
You know, you kind of went through the levers, right?
Yep.
Recontracting and getting it-
Cost adjustments, programmatic changes. We have a kind of robust effort, and we need a little time to see when they'll play out. But we have every expectation as a team. We will improve the performance of that operation.
You know, we all know Sam and yourself are pretty demanding guys and laser-focused on the numbers. So what is the reasonable aspirational target there? Is it to get it to break even, or is it to have that be contributory in some way?
I'll take either at this stage.
Yeah, I think we will too.
I think a fair expectation for us would be to try to get it to at least break even on its historical perspective. But understand, historically, we're still paying subsidies into these programs, so there was still just an embedded run rate on those. So give us a little time, given our size, and as we go through our planning process, we'll try to put the whole physician spend in context for you.
Mm-hmm.
I think historically, we'd say our, our goal was to keep our physician spend underneath our revenue growth to avoid margin erosion from all of those line items that we combine.
Right.
Valesco is just one piece of that aspect-
Yeah
On there. Clearly, the marketplace has got some disruption. We're managing through it. We have expectations. We'll address it just like we've passed other issues, but we expect to improve the run rate of not only Valesco, but our physician pro fees going forward.
So the last question there would be just, you know, and I think I asked Frank this after the third quarter, but... You know, when you're, you know, no one has visibility on what's gonna happen, but one of the questions I would be asking if I were in your shoes is just, I'd be sitting down with these physician groups and saying like, "Okay, we just gave you..." You know, there have been massive increases, right? Up 20%. So does that get them healthy, or does that, you know, is that a, you know, Band-Aid to where they need to get, right? If you're dealing with a management company, that management company not only needs to break even, they need to make a margin-
Yep.
Right, to be in existence. So have you any thoughts on, you know, where you think they are within that? Have you gotten them to break even? Have you gotten them to a target margin?
I think so. And then, you know, to the extent there's others out there, we have now a scaled operation where it gives us an alternative. Where historically, your only alternative was to either pay the subsidy or RFP it to another provider, and there are not a lot of those left.
Right.
So now we have a... We believe there's an opportunity for us to provide a scaled solution for, for other providers in there. So to the extent some aren't able to get to a margin production, and they're coming to us for subsidy, I now have an alternative that we can incorporate these, these providers into. So I think, though, to answer your question, for the ones we've addressed, I think it's dealt with the issue, and I think we've dealt with the most acute issues here already. And then going forward, I think that's what gives us confidence we can sequentially improve that trend.
I'm gonna leave it there. Bill, Frank-
Okay.
Thank you very much for your time.
Yep.
Thanks, everybody.
Thank you, everybody.