Morning. Welcome to Oppenheimer's 34th Annual Healthcare Conference. I am Mike Wiederhorn, healthcare service analyst. It's my pleasure to introduce HCA. With us from the company is Bill Rutherford, Chief Financial Officer, and Mike Marks, SVP of Finance, incoming CFO. Bill, congratulations on upcoming retirement.
Thanks, Mike.
One more note before we jump into the fireside. There's a Q&A box in the top right corner for those who want to ask a question later on. So let's just start. We'll start. We'll jump right in, you know, kind of a broad question here. Can you just provide us an update on the business and how you feel coming out of Q4 into the new year? Some just general high-level comments.
Yeah, I mean, I think as we went through 2023, we felt we were gaining momentum. And we were very pleased with the operating results of the company during the course of the year. You know, when I think about that question and kind of walk the income statement, if you will, we feel like there's good volume demand trends that we're seeing. Our adjusted admissions grew, I think, 4.8% in the year. Our inpatient admissions were up over 3%. So we think fundamentally we're well positioned in the market. We see good trends, population growth. We see good enrollment in the health insurance exchanges. Our strategic initiatives with service line expansion, physician recruitment, and capital investment are all part of the equation. So we see, I think, good demand in the markets.
I think about we saw a good payer mix, as I said, with a good enrollment in the health insurance exchanges. We continue to see advances in our acuity trends. I think we're well positioned from just an overall pricing and contract positioning on there. So I think that portends good things for us. We were very pleased with the labor trends we saw throughout 2023, especially coming off the period of disruption that the industry occurred in 2022. Continued improvement in our utilization of contract labor. Our turnover is down. Our hiring is up. Supply trends have been really stable. We did, as we talked throughout 2023, have to deal with, you know, increased pressure on our professional fee line. But we were pleased towards the last half of the year, the sequential rate of growth that started to moderate on there.
We felt we were well positioned coming out of 2023, and we incorporated that. Hopefully you heard that in our 2024 guidance that we laid out.
Great. So just to go a little further on admission trends, do you think we're seeing any temporary elevated patterns due to the deferral of care? And how are trends in, you know, Medicaid versus MA and versus other payer sources?
You know, it's hard for us to digest exactly why we're seeing them. My belief is it's not as much a deferral of care, especially if you're related to care that was deferred during COVID. I mean, the last COVID surge we had was January 2022. So time has passed. I think if people were deferring care, it's likely washed through the system right now. I think there's just good fundamentals. One, our markets enjoyed great population growth during COVID, obviously with our presence in Florida and Texas. I think we still are in, you know, a very strong employment environment, and there's a strong correlation, I think, between employment and economic trends with healthcare demand. And then again, I think our strategic initiatives are paying dividend. We saw share gains as we went through the most recent cycles. Our capital investments, our physician recruitment, our service line.
I believe it's more of those kind of macro trends than any deferred care that we're seeing. There may be a little bit of that, but it's hard for us to discern. I think it's mostly just strong fundamentals that we have in the marketplace and a reflection of how we're positioned in front of that.
Are you seeing any difference in the, you know, like MA versus Medicaid versus commercial?
Yeah. Well, yeah, let me speak to that. So first of all, we saw really strong commercial growth, as I mentioned. I think that was fueled with the enrollment in the health insurance exchanges. Our overall Medicare book grew, I think, 4% or so. But our MA book grew, I think, probably 10%-11%, pretty consistent throughout the year. And I think, you know, there's a combination of factors in that. I think just continued conversion from fee-for-service lines into MA was probably the primary driver of that. There may be some utilization trends in there. It's hard for us to exactly see utilization trends. But our MA book grew pretty consistently throughout the year. We did begin to see in the last half of 2023 some declines in Medicaid that we think are largely probably due to some of the Medicaid redeterminations on there.
Some of those are in a pending status as we go through, you know, trying to search for eligibility in them that hopefully they'll regain Medicaid. Some of those, we believe, found their way into both employer-sponsored insurance as well as the health insurance exchanges. So there may have been some modest benefit due to that. But overall, we're pleased. And I think the payer mix trends we saw characterized would be net-net positive.
On the Medicaid determinations and, you know, kind of when we think about the health insurance exchange mix, you know, how should we view the impact on the business, you know, from a net perspective?
Well, I think this modest benefit is how I would characterize it. I think what we're seeing again, it's still relatively early. It's been the last half of the year. We're actually seeing a larger portion than we anticipated or a larger percentage of those people who lost coverage able to regain coverage. They may have been dropped for a technical reason. They didn't fill out an application. And as we go through the eligibility, we're seeing, you know, a decent portion of those, maybe two-third, actually be able to regain Medicaid coverage. And then the balance we're seeing probably mostly into the health insurance exchanges. I think it's probably 20%-30% was our initial indication. The numbers are still relatively small. So again, so we think there's some modest benefit from that. And we'll need more time as we go through 2024 to see that fully ramped up.
As you know, different states were implementing that or executing at that different levels. We'll continue to watch that and let you know what we're seeing as we go through the year.
Perfect. You mentioned market share trends. You know, when we think about the pandemic impact on your share gains, you know, how do you think that affects your ability to gain additional market share going forward?
Well, if I go pre-pandemic, we'd historically see, call it, 20 basis points-30 basis points of share gains a year. I think we went from 23% composite share probably a decade ago in 2014 or so up to roughly 27% now. Obviously, COVID interrupted that and put a lot of noise in that. Now we're starting to see that settle. We think we're generally well positioned for market share gains. We saw some gains as we went through the COVID cycle. We think we're going to return back to historical demand patterns. And we'll see how that happens. Some markets gained at greater paces than others. We had a few markets that were flattish. So as a composite, I think we're well positioned to continue to see market share gains going forward.
Okay. That makes sense. You know, when we move over to thinking about acuity trends, do you think you're at steady state? And how does the addition of, you know, new programs like stroke centers, trauma programs, how's that playing into that and kind of your overall picture of kind of how you're positioning in the business going forward?
Well, we saw some slight increases in case mix. We're very pleased with that. As we went through COVID, as we talked about, we saw really strong acuity as measured by case mix. That was largely driven, in my view, with the lower acuity business staying away and what we were left with higher acuity. We saw really strong acuity gains during that period of time. As we came out of COVID, our goal, honestly, was just to maintain that level. That was positive. We saw that through 2023 with some modest gains. A lot of our strategies, not the majority of our strategies, are focused on deepening our clinical capabilities, i.e., providing higher acuity services.
So I think we're well positioned as we expand acuity in cardiology, as you talked about, whether that be through or through neurosciences, through stroke programs, through trauma programs in the emergency rooms, through expansion of our neonatal intensive care units. So a lot of, if not most, of our strategic initiatives are intended on deepening our service line capabilities, which generally brings a higher acuity service mix with it.
You know, kind of shift gears over to contracting. You know, how are rates trending in the managed care negotiations? Are you handling the renegotiations any differently given, you know, inflation and how it's entered into the system in recent years?
I'd say it's pretty stable. I mean, we're 80% contracted for this year, maybe a little more. What are we for next year? 30% for next year. You know, we're able to secure contracts in line with our expectations, which we said is kind of that mid-single digit. I tend to look at the pace of being able to secure those contracts. We're able to secure those contracts, you know, in cycle. So I would characterize it as stable. We, you know, began to see some efforts on our part when inflation hit in 2022, and we're able to continue that. So I think we're generally well positioned both in terms of access within the terms as well as the pricing adjustments we're able to achieve.
Also on the managed care side, you know, on value-based care, you know, kind of what are you seeing there? Are you seeing changes in structure? Are you seeing these contracts being pushed forward to you at the table? Kind of can give us an update.
No. No. No material changes in there. I mean, we have, you know, our contracts have some aspects of some benefits, some pay-for-performance trends, some measures, but it's a very small percentage. So I would characterize we don't see any kind of material changes to those structures or any major push to, you know, take more risk or move more into this fee-for-value kind of arrangement. I'd say there's no material trends in that.
Okay. So breaking down, you know, kind of contracting and looking at revenue per adjusted admission, you know, how should we be thinking about it, you know, when we look at it, you know, through different, you know, the payer mix, through Medicare, Medicaid, commercial, you know, the different components, and how, you know, the strength of it? How should we be thinking about that positioning, you know, throughout the year?
Yeah. Well, we've targeted 2%-3% growth in our composite revenue per adjusted admission. You know, three primary factors that go into that. One is just our pricing adjustments we receive, both updates from our governmental payers as well as our commercial pricing increases. And we think we're well positioned and, as I said, have good visibility into that. The second piece becomes our acuity trends. As I said, we continue to be focused on growing our higher acuity services. And then the third is the payer mix component. And we've seen very strong, very favorable payer mix, again, fueled by health insurance exchanges, fueled by, I think, a strong employment economy that we're in. So we think we're well positioned to achieve that 2%-3%.
Hopefully, there'll be some periods we can be on the high end of that, some periods maybe on the low end. For planning purposes, 2-3 composite is a pretty good estimate for us. We think we're well positioned to achieve that.
The visibility, you know, kind of the visibility in the managed care book, you know, how is that? Where are you at right now?
Well, as I said, we're 80% contracted for this year. We're a little north of 30% contracted for 2025. So we have, I think, good visibility, at least in the short-term and intermediate term.
Okay. You know, sticking on, yeah, staying on the revenue and rates, you know, you know, supplemental programs, you know, kind of give us an update what you're seeing there, what you're seeing in terms of changes or new programs across key states, you know, and in color that would be.
Yeah. Well, I think as we talked about in our year-end call, we've seen, you know, I think we have supplemental programs in 18 of our states right now. We saw new programs in North Carolina in 2023. We're anticipating a new program in Nevada. These programs are large right now. They're an important kind of part of just the healthcare ecosystem in those states designed to compensate for some of the traditional underfunding of Medicaid. Many of these programs are large. They're nuanced out there. I would characterize most of the programs as stable. I mean, they're always subject to some changes. We did benefit in 2023 through some recognition of some retroactive parts of those programs. So we laid out our guidance of, you know, a potential $100 million-$200 million headwinds just as a on an as-reported basis. But we think they're mostly stable.
We see, you know, these programs in Texas being kind of our largest and most longstanding program, the North Carolina program. We had a new program in Georgia that started in late 2022, the Nevada program. So again, I think it's an important part of just the overall Medicaid funding. We disclosed in our 10-K, there's probably about $3.9 billion of revenue across these programs. So they're an important part of the funding mechanism that occurs. Again, they're always each state has a little bit of nuance in terms of how you recognize it and when you recognize it. But I characterize it outside of just kind of the headwind we called out. Most of those programs are pretty stable.
Okay. Do you have any, you know, additional thoughts on the upcoming regulatory season on the Medicare, you know, rate side? Either for answers specific from either on the inpatient or outpatient or more status quo from that perspective?
No. I think our position now is more status quo. I think, you know, we historically land 1.5%-2% rate increases when you factor everything in for Medicare. We'll have to wait to see what the next update occurs. But my belief is probably going to be in that range. It has for a long time. There are some periods it's a little higher than that. Some periods a little lower. But I think 1.5%-2% governmental rate increases is kind of what's embedded in our long-term planning. But right now, I don't have any insight into any other major changes on there. Obviously, as we go through the election cycle, there's always chatter that's going to occur. But it's hard to get anything really materially passed through. But we'll continue to keep our eye on it.
Okay. Shifting gears, you know, a hot topic has been the Two-Midnight Rule. You know, kind of give us kind of what you have historically observed, you know, kind of where it's a shift and how is that changing your business and how is it dealing with the insurers as well on this?
Yeah. I'm going to let Mike take that.
So the Medicare Two-Midnight Rule, as you know, was applied to Medicare Advantage on January 1, 2024. As we discussed in our fourth-quarter earnings call, we expect this to take some time for the Medicare Advantage payers to adopt this new rule and let it process through. We're seeing that as we go through the year. It's, you know, it's taking them a while to adjust their processes and procedures to really kind of see the end result we're expecting. We do expect it to be positive for hospitals and, frankly, for Medicare Advantage members and patients as well over time. But it's going to take a while.
This is a pretty material change to the processes for the Medicare Advantage payers on how they review and kind of do their medical necessity reviews and the like related to which patients would be inpatients versus observation patients. So it's happening about like we thought it would. I do think over time, it's going to be a, you know, modest positive for the hospital side and, again, for the Medicare Advantage patients. But it's going to take a while for us to see it as the payers adopt.
You know, dealing, you know, sticking on the payers, you know, staying on that subject matter, you know, there's been a lot of talk, obviously, with pre-authorizations, denials. You know, there's a lot, you know, it's been in the news a lot. What are you seeing any changes or what are you seeing currently? And do you see any changes going forward on the whole pre-authorization and denial process?
Yeah. There's no question. There's a lot of concern in the industry, especially in the Medicare Advantage side about just the level of growth and pre-authorization denials and, frankly, denials generally. And so, you know, it's a topic of conversation between, frankly, all providers and all payers. And we're working with our payers carefully to make sure that, you know, that we get paid fairly and appropriately. And we have routines and processes to help us do that. The Two-Midnight Rule was designed, frankly, on the Medicare Advantage side to help reduce the amount of administrative denials related to patient status. And I'm still hopeful over time that it will do that. So I think that's a positive thing.
Mike, I think we saw what I think widely has been reported in the industry that probably late 2022 throughout the course of 2023, we saw denial rates increase throughout the year. I think, you know, during COVID, many of the payers turned off a lot of their pre-authorizations and their denial and edits and recognized the turmoil the industry was going through. So they relaxed a lot of that in 2023 to the benefit. And they turned a lot of those back on once we came out of COVID. And so we, I think, along with the industry, started to see increased denials, increased utilization activities. Mike, exactly leading an effort where, you know, we've got a tremendous amount of resources dedicated to being able to counter those denials. And I think we're in much better position than many systems just given our size.
We try to advance really strong and strategic relationships with our payers. But it's an issue that the industry is dealing with and we're dealing with. And hopefully, like we said, if some of these policy regulations can provide some more clarity on there, like the Two-Midnight Rule is intended to be a bright line of when a patient qualifies for inpatient status versus some subjective criteria, that net will be a positive for the industry.
Sounds good. So let's move over to the cost side of the formula here. You know, at your Investor Day, you know, you discussed about, I think, $600 billion in annual cost savings over the next, you know, five years. Obviously, still early in this timeline. If you can give us any updates you can provide there and kind of where the status of these initiatives are going.
Yeah. I'll let Mike bring this. He's leading what we kind of broadly call our resiliency programs that has a number of initiatives underneath it from what I'll call our next generation of shared services that are in the process of implementing. An example of that is lab consolidation efforts that we've had going on through our markets. Another example of that is efforts around consolidating some of our environmental services and food and nutrition. We have efforts around benchmarking, and we have efforts around, you know, this integrated revenue cycle. So all of those are in flight.
They are. You know, probably the earliest one with the most traction is our work to reduce premium labor spend. If you look at 2023 is a good example of this. Our contract labor was down 20%.
You know, I think as you think about the height of COVID, you know, our contract labor as a percent of SWB was getting close to 9% at the height of COVID and surges. We were able to get that down in 2023 to just over 6%. That work is really reflective of much stronger retention of our clinical workforce, especially our nursing workforce. A lot of efforts around recruiting to backfill the premium labor with new nurses. A lot of structure around the supply of nursing with adding academic affiliations with nursing schools, the Galen College of Nursing, and the like. So, you know, that whole area around reducing premium labor spend is a great example of the resiliency project in flight.
The other one that we highlighted in Investor Day that continues to demand a lot of attention is our length of stay management routines, the case management. As we noted in our Investor Day in the fourth quarter, we were able to reduce our length of stay by almost 3% in 2023 versus 2022, you know, producing the equivalent of almost a 500-bed hospital of new capacity without spending a dollar of capital. So the length of stay efforts that we have are deep and broad and continue to produce good results for us as we move into 2024. So 29 work streams across all of our cost sectors. Those were three or four that we mentioned. And we're excited about our resiliency program as it continues to mature into the future.
To dig a little bit more on the labor front, you know, can you kind of give us an update where you are on labor right now in terms of contract labor, are rates at a steady run rate, and how should we be thinking about that going forward, you know, positioning-wise?
Yeah. I'll take a stab. Mike can add in. I'll characterize the labor market as stabilized, especially compared to what we saw in 2022. And so we believe, as Mike just talked about, there's continued improvement to be had in premium labor. And we're working diligently on that. We are working diligently. And our turnover rates are down. They're almost at pre-pandemic levels. We've invested heavily in our recruitment and retention. We're seeing our net hires go up. So all of those go into play with the market kind of settling. So I think labor trends will mostly be stable, guided to keep our labor costs in line with our revenue, probably wage inflation somewhere around that 2.5-3. And all that's manageable within the context of our trends. So we're pleased with the results we saw in 2023.
We believe, you know, 2024 will be able to manage through that as well. So I think it's mostly stabilized. I mean, obviously, we always have to deal with some pockets here and there geographically. But we have the size that we can manage through that. But we continue to work very, very hard. We have a lot of our initiatives. As we came out of COVID in early 2022, you know, the organization was intently focused on that. And I think our results prove that we've been able to be successful there.
Keeping on costs. You know, can you give us an update on Valesco and, you know, kind of your outlook for physician costs in general?
Yeah. I mean, obviously, Valesco was a topic of conversation throughout 2023 and kind of gave you our guidance, I think, in our year-end call that, you know, we do expect some sequential improvement in Valesco as we go through 2024 as we deeper integrate it into HCA. We're looking at are there opportunities to reduce redundant overhead costs? We're looking at revenue enhancement opportunities. We're looking at program adjustments where necessary. And we'll think we'll be able to improve the run rate of Valesco. It was, you know, strategically important that we managed and took control of those programs in light of the bankruptcy that Envision was going through. So strategically, it was an important move for the company. And we're going to further integrate that.
We actually think that it gives us an operational capability that as other programs face challenges, that we'll be able to integrate other programs into that structure that we're building. Again, I think for 2024, we're expecting to keep the full impact about consistent with what we saw in 2023. We only operated for nine months in 2023 versus 12 months in 2024. That applies some incremental improvement as we go through the year. Again, I think it will just be embedded into our normal run rate.
I'd rewind down here a couple more minutes. You know, one obvious headline has been Change Healthcare. You know, it's obviously having significant implications across the healthcare spectrum. So just wondering if you can touch on what you're seeing and how you're dealing with it and cash flow impact and so on.
Well, obviously, it's a big issue the whole industry is having to deal with. I'll say from the get-go that we've had no impact on patient care. We don't think, at least what we know now, there's going to be any material impact on HCA. We think we're well positioned. Our teams have worked very diligently. We did use Change Healthcare and their product for a large portion of our billing system, our billing interface system in there. We have worked diligently over the past 2.5 weeks to convert to another vendor. We're now almost fully converted to another vendor. So there will be some temporary cash flow impacts as we went through a week or two withholding bills as we went through that conversion. We were very fortunate that we already had an established relationship with another electronic billing vendor.
And so our teams worked tirelessly to convert those over into a new and now we have claims flowing. So we're able to manage through that. It will have some short-term liquidity on us. But we've got the liquidity, short-term cash flow impact. But we've got the liquidity to manage through that. So no material impact from HCA. And again, our teams have kind of reestablished billing interfaces with another vendor. So it's unfortunate that the industry has gone through that. But we, I think, are much better positioned than many others to weather through that.
Are you seeing any changes in procedure rates, you know, due to the waiving of pre-authorizations?
Mike, I'd say maybe early on, you know, there were a lot of manual processes that we had to go through. But I think they're mostly getting reestablished to historical trends. That's right. I don't think we're going to see any, you know, material or notable at the end of the day changes in authorization rates as a result of this.
Okay. We've got one minute here. Last question. You know, I just want to talk broadly about your capital deployment priorities and anything that you would like to touch on there.
Well, as we laid out in our guidance call, you know, our first priority is to make sure we have the capital to meet the growth opportunities in our markets. And so that's through our internal capital investment program. We think that we have that size well. It is growing in 2024 versus 2023. And I always tell people, you know, you should look at that as a signal as the opportunities we see to deploy capital for growth. We still see great projects with really strong returns. And we have the capacity to fund those. And that contributes to the overall growth of the company. Our second priority is to maintain the balance sheet in a strong position. We're operating our leverage at the low end of our stated range. And we think we're in a really strong position in there. We had a small increase to our dividend.
And then, you know, we dedicate, you know, a portion of our capital into a share repurchase program. And so I've always characterized it. I think that's a very balanced and disciplined approach to capital that I think contributes to long-term value creation. And we think we have a track record of doing that. So capital investment to be growth opportunities, maintain the balance sheet to be opportunistic, you know, continue to pay a small dividend. And then the balance goes into a share repurchase program, which we believe is a value enhancement feature.
Well, we're out of time. I appreciate it. Bill, thank you again. Good luck on your retirement. Mike, we look forward to working together in the future. Thanks again.
All right, Mike. Thanks for your time. Thanks, everybody.
Bye-bye.