We'll get kicked off here. Mics are on and everything. So, hi, hi everybody, I'm Lance Wilkes, the healthcare services analyst for Bernstein. Really appreciate everybody attending the conference and attending today's fireside chat with HCA. And so, please submit questions via Pigeonhole as, as you like during the session. I've got the tablet up here. We've got a series of questions we'll go through. Again, the orientation, you know, a lot of the investors here will include portfolio managers who, you know, are interested in the long-term story of HCA. So maybe as a, as a kickoff to Sam, if you could just introduce yourself and, and kind of frame the company a little bit and maybe the, the, the pitch as to, you know, what's the strategy and the, the vision for HCA?
And then we can kinda walk through strategies, some near-term operating questions and long-term setups.
Sure. Thanks for having us first, Lance. So I've been with the company 41 years, been CEO for, 5.5 years. I was Chief Operating Officer prior to that for about a decade, and I was a group president, and I was out in the field. So at HCA, you sort of move around. We're a company that has a lot of tenure with our executives. Many people start their careers and end their careers with the, the company, and I think that's, in and of itself, a testament to the unique culture that we have as an organization.
At our Investor Day, just recently in November, we talked about the unique staying power of HCA and how it's sort of been able to sort of push through different cycles, different policy environments, different competitive dynamics, and so forth, and really come out on the other side of it, a stronger organization, making the appropriate adjustments as necessary, but never really deviating from the core. And the core of who we are as a company, Lance, is that we're a hospital-centric health system. That's who we are. I mean, we depend on our hospital systems, individually within each market. We operate within 43 U.S. markets, one international market, mainly Central London, but a little bit beyond Central London. So each of those markets has a set of circumstances that we need to nuance around regulatory, competition, demographics, whatever.
But the power of HCA, I think, comes in the fact that we can marry up those local systems with the national system and bring a differentiated set of attributes back to the local market. So we use our national center, our national system capabilities to create economies of scale with, you know, consolidation of administrative functions. We use our enterprise to create opportunities for identifying best practices, which we will transport across the company, regionally or even nationally, in some cases. And then we've been able to use the company's balance sheet, if you will, in cash flow generation to invest, we think, differentially in our local systems. And so that formula has produced really strong outcomes for HCA.
If you look back over time, and this is a business that takes time to develop and evolves, if you look back over the past decade, we've grown our market share as a company from roughly 23% to north of 27%. Doesn't sound like a lot, but in the aggregate, that's significant growth for us as an organization. During that past decade, Lance, we did some inorganic transactions that helped the profile of the company, but in the near term, we really haven't had that same opportunity. So it's been about building out our local systems, which is our first sort of pathway to growth as we push through the rest of this decade, is really expanding our networks locally to take advantage of what we think is a unique portfolio of markets that are maybe better than the average.
I mean, Florida, we're really large. Texas, really large. Number 1 and number 2 system in all the major communities in those two states. We're also large in Nevada, Utah, Colorado, South Carolina, Tennessee, places where there's a lot of growth in the country today, and we're benefiting from that. So expanding our networks and creating a large ecosystem around our hospitals is what we're focused on in each of our different divisions, and that's allowing us to add outpatient facilities very significantly to our networks. Today, Lance, we have about 2,500 outpatient facilities. That translates to 12-13 outpatient facilities for every hospital. That's not a formula per se. It's really an outgrowth of the model that we think is necessary to create the convenience and the value for our patients, but integrate downstream into our hospitals.
The second part of our growth trajectory is something we're calling Operational Transformation, and within operational transformation, transformation is a word I don't like using. But I think we're at an inflection point as a company where technology and new digital tools that continue to evolve have real meaning in inside of our organization. And so we're investing heavily also in our operational transformation agenda. It includes a technology element that we think is gonna allow us to gain better insights into the processes that we have within our company. It's gonna improve our administrative function and really our ability to manage the operational aspects of our business.
And that's gonna produce quality improvement for our patients, a better place to practice for our nurses and physicians, and we think more efficiency and better insight into managing the business as an organizational value. So we're pretty excited about that component. The second component of operational transformation is around workforce development. We need people as much as we need capital to expand our networks, and we are investing heavily in workforce development, really around three areas... nursing with our Galen College of Nursing expansion that is going on. We acquired a nursing college in 2020. They had four campuses. We're up to 20 campuses today. We'll be up to 30 campuses by early 2027, making us one of the largest, if not the largest, educator of nurses in the country.
That's important to our ability to meet the demand that we see in our markets. We're also investing in a graduate medical education for physicians and then Leadership Institute for leaders, because we need capacity in all three of those. And then the last pathway to growth, Lance, for us, is really with the value creation we see with the optionality we have with capital allocation. We produce a lot of cash flow. We're able to use a large piece of that cash flow to invest back in network expansion or invest back into operational transformation. But then we have opportunities to use the excess capital, if you will, through our shareholder programs and provide capital back to our shareholders through dividends or share buybacks.
We've been pretty active in both of those categories over the last few years. We see those three components as being refined as we push through the rest of this decade and creating opportunities for us to improve in the market, but also improve in the aggregate as an enterprise.
That's great, and I think that lays out a lot of the foundation. You know, for some of the investors, maybe we could just give an example of, kind of like for a sample market. Maybe the example of, like, I've always thought that market density strategy you've got is a really effective strategy. So maybe just a sample of, like, the number of hospitals you've got in the market, and then the characteristics of the outpatient relationships with physician versus other access points or surgery center.
We talk within our company often about where you compete is just as important as how you compete. So we, like I said earlier, we compete in some great markets. Let's just take Dallas-Fort Worth as an example, which is our largest market. We have the second market share position in that community. We've moved from third to second over the last five years or so. And in that particular situation. And let me back up. In all of our markets, we're either number one or number two, with the exception of a handful, where we're a number three, but we feel like we can produce reasonable returns on capital in those markets. Our formula, Lance, is built around creating local scale, local scope of services, and integrating the whole network into a system.
Easier to say than do, but that's what we're trying to accomplish. So in Dallas-Fort Worth, as an example, and it's comparable to Houston or Miami or Tampa or Denver, I can go to any of these places, it's the same way. We have 18 hospitals in the DFW area. Different kind of hospitals. Some are smaller, some are larger. We tend to have, you know, a scenario in most communities where we have multiple hospitals. In DFW, we probably have 500 outpatient facilities or clinics that are connected through affiliates, through our own wholly owned entities, partner entities, and so forth, supporting those 18 hospitals.
We try to put wraparound services that can support them, so we have our own transfer like dispatch center, for lack of a better term, that helps patients, helps EMS navigate through our system. We have our own ground and air transportation capabilities to support the network, and then we have a lot of physicians. I mean, we need physicians to make the system work. Our goal within each of those communities and each of those local systems is to be a one-stop shop. And by that, I mean, we want the patient to have easy access in an outpatient facility to start their process. So we've pushed our facilities closer to the patients because these are fast-growing communities, really efficient offerings, better price point, better throughput.
But if they need deeper clinical care, we can take care of them somewhere in our hospital systems. So we build out services to where we can offer, you know, whatever complex, acute services necessary to take care of those patients. In Dallas-Fort Worth, as an example, we have, you know, transplant programs, we have trauma programs, we have really sophisticated children's programs. All of these elements are necessary for us to keep sort of the closed loop. That is not exactly the same from one market to the other, but that's sort of a prototype approach that we would take in sort of building out the local system.
That's great, and actually, when we'll talk with folks and give examples about you. Oh, you actually use Dallas-Fort Worth as an example. I know from, as an insurance guy, that you would be really interesting because you're sort of a must-have in a network. And so, you know, you're so comprehensive, so dense in markets, that it isn't really easy for an insurance, you know, on the employer side, for example, to avoid, having HCA in, into those, at least as demonstrated.
Yeah, I don't like to say we're must-have. I like to say we're relevant. And I think the relevance produces opportunities for us to participate broadly in payer contracts. And we do participate in just about every contract that's available to our facilities in each of the communities. We've actually improved our overall contract participation in the different areas, Medicare Advantage, Commercial, Exchange and Medicaid over the past three to five years, and we've lifted ourselves to where we have largely full access to all the population in a community, which is important. I don't think it's must-have. I don't like to use that term. I think we need to be, we need to earn it.
Yeah.
We need to be relevant, and we need to have a system approach, and if we can do that, then it's value to the payer. It's value to the patient, value to the doctor, and then ultimately value to HCA.
Yeah, totally makes sense. But before I get into some of the kind of current dynamics that are going on in the market, I know you guys, with your Investor Day, had laid out kind of a long-term framework for EBITDA growth, for EPS growth. For the investor community here, if you wanna just kind of refresh everybody on kinda what that long-term algorithm is for you guys.
Can I ask my CFO?
You bet.
To do that?
Yeah.
Mike Marks.
Sure, yeah.
If you think about kind of the power base case, 'cause a combination of the suggested EBITDA growth, the 4%-6%, that 4%-6% growth in adjusted EBITDA comes from 2%-3% growth annually in equivalent admissions, and 2%-3% annually in net revenue per equivalent admissions, so volume and rate. So that sets that top line at 4%-6%. We've been able to maintain our margins over the years, and with that margin maintenance, that gives us the ability to grow EBITDA 4%-6%.
So you take that power of the network that Sam just talked about, and you combine it with our capital allocation, and, you know, with our investments back in our facilities, with our payment of a modest dividend, and then, you know, we use our free cash flow then to do share repurchase, which then allows us to turn that 4%-6% growth in Adjusted EBITDA into an 8%-12% growth in EPS. And, and you've seen that power, the power of the stock over the last decade, and, and that's really the, the formula we talked about at Investor Day.
That, that's perfect, and I think great framing for the, the audience. Let me turn to some of the questions on sort of the current environment, and then start to walk through value proposition and longer term trends and opportunities. So you've had tremendous recovery in, in volumes over the last, you know, couple years about now. You know, how are things looking thus far in the year, and as we're kind of moving into the second quarter, you know, any changes, and, and what's sort of the outlook for you guys for, for volumes, this year?
Well, we started seeing solid demand for our business actually in 2022, and it really accelerated a little bit in the last half of 2023. That's carried itself into the first part of 2024. So our first quarter results were really strong from a volume standpoint. We actually guided at the beginning of the year, slightly above what Mike just talked about on volume for 2024, simply because we felt the momentum that we saw in the marketplace and in our business at the end of last year would continue into 2024.
So we set our volume expectations at around 3%-4%. Clearly, the first quarter was above that, and so just doing some simple math would suggest that we're gonna be at the top side of that guidance, and that's pretty much where we think we will be. I think the second half of the year, the comparisons get a little bit more difficult, but we're anticipating, you know, strong volumes as we push through the rest of this year.
At our Investor Day, we talked about what we saw as strong demand for healthcare over, we'll call it, the intermediate run to the long run, and for us, it's population growth, aging baby boomers still drive demand. You have chronic conditions in communities, and that all lifts demand for healthcare. We expect our long-term forecast for demand on the inpatient side to be 1.5%-2%, and then on the outpatient, 2%-3%, so it's in line with what Mike was alluding to. And if we can continue to gain market share, which we have a goal to improve our market share, then you know, really creates a solid opportunity for us to achieve and maybe even exceed some of the expectations that we've put forth.
There's no reason just to get ahead of what we see today, just because, you know, there's things that happen in healthcare. It's hard for us to judge, is there really pent-up demand from COVID? I find that hard to process, that people would sit on the sidelines for almost three years if they hurt. I'm not sure why they would do that just because of a pandemic. But there may have been an element of that, but I think in 2023, no, it, that wasn't an element. In the first part of 2024, no. There's just a lift in activity that I think is a result of more coverage for people. I think there's a lift in activity because there's more confidence in general, and I think we're growing market share a little bit, and that's why we're seeing some of these volumes.
Yeah, it makes a ton of sense. One of the things we've spent a lot of time over the last couple of years looking at is on the supplier capacity side and labor supply and trends there, and we think—we've thought those have been really favorable for you and for the industry. Could you talk just a little bit about, I mean, compensation expense is one of the ways it represents itself, but also just, you know, your capacity to be able to continue to expand the labor force, to expand volumes. What's going on sort of from accessing labor cost to labor perspective for you?
Well, just let me give you a metric, right off the bat. You know, we were struggling with, I'll call it, labor supply in 2022 and in parts of 2023, and we were having to turn away patients through our system that I just talked about, because we just didn't have the labor to open up beds or provide the appropriate coverage to the patients, and so we had to you know, turn away those patients and get them into somebody else's system, unfortunately.
We have improved that significantly over the last nine months, and our ability to receive patients because of sufficient supply of nurses and other caregivers has increased. So the market as a whole has normalized a little bit. Compensation trends are down from where they were in 2021 and 2022. Some of that is due to a better mix of premium labor and employed labor, so that's helped. Some of it is due to the fact that there were a lot of compensation adjustments that we had to make to get competitive in the market. Those have started to normalize a little bit.
So we think, you know, our view on inflation, on wages right now, it's somewhere around 3%. And, you know, that considers, you know, the compensation adjustments we need to make for purposes of being competitive, inflation, and then also, a little bit of the, I'll call it the arbitrage with getting the right mix of labor into our equation. But at the longer term, our workforce development is geared towards sourcing and developing, a pipeline of nurses, and that's where our Galen College of Nursing program and some of our other educational programs, Lance, really create a differentiated opportunity for us. We have an opportunity with Galen to create a totally different nurse student experience.
Marrying up the clinical aspects that we can provide with the classroom aspects that Galen can provide, putting metrics around that, putting a different kind of integration around that, hopefully creating a better student experience for the Galen competitiveness, creating a better nurse on the way out, and then hopefully retaining them in the HCA system so we can pipeline talent. We want 30,000 students in our programs in 2027, graduating 7,000-8,000 students a year. And if we do our integration correctly, which I'm confident we will, then that becomes an interesting pipeline for us to create capacity to manage the mix of our labor effectively, and really change the paradigm.
Yeah.
So we're pretty excited about that.
No, that, that's fascinating, and, and again, seems like really differentiated with the ability to access labor in a, in a different way than, than your competitors. Before I get to some other aspects of, of things that are going on right now, one of the other things that was really intriguing to us over the last couple of years for you guys was at, you know, in, like, 2022, you were hit with wage inflation and, you know, some of the premium labor and whatnot, but the nature of the hospital contracts was such that it wasn't immediately passed along. And so, like, our, our view had been, well, it's gonna get passed along. It's an industry issue. That's something that, that, like, managed care ideally is gonna have to deal with. Obviously, government will deal with in whichever way it does.
How are rates? What's the rate environment like for 2024 that you're experiencing now? What's the outlook for that as you move forward?
Let's just say pre-2022, our trends on pricing on the commercial book of business was, you know, 3%-3.5%. It's slightly above inflation.
Yep.
B ut, you know, at a more moderate level. Once we started to see the wage inflation, and now we've seen some physician pro fee inflation, you know, we have lifted our target on price escalation within our commercial book to the mid-single digits. So we've accomplished that mostly, and in 2024, we're pretty much fully contracted. In 2025, we're maybe halfway through the book, and then in 2026, we're maybe at 25%-30% of the way through the book. And we're able to achieve the targets that are necessary to compensate for the two inflationary components that we've seen. Seen a little bit of inflation in supplies, but it's not nearly as significant.
I think you go back to our networks, it's important that we have the relevance and have the system capability to create the value for the payer that's necessary for them to sell to their members. So it's, it's an integrated process for us. I think the second thing I would add is occupancy levels in general, not just in HCA facilities, we're at an all-time high, but in general, within our markets, is at an elevated level. And that creates some microeconomic dynamics within the market that gives us, you know, some confidence that we can achieve appropriate escalators to compensate for, for inflation. On the government side, it always lags, and it tends to be insufficient, so we have to have other efforts to compensate for that.
Efficiency efforts, you know, throughput efforts, growth, all those help us compensate for the insufficiency in government reimbursement increases. We have operating leverage, Lance, as a company because of the fixed costs within our hospitals, so our growth agenda becomes part of our pathway forward on mitigating some of the government challenges that come with reimbursement increases on a year-over-year basis, because the contribution margin and the leverage we get on our fixed costs are real. Now, that's assuming, you know, we don't have a physician cost pressure point. But setting that aside for a moment, there are opportunities for us to leverage our fixed costs and help compensate for some of those insufficiencies.
That's super. Let's talk a little bit about kind of your mindset in the market as you're competing with competitors. Maybe if you could frame just the level of fragmentation of some of the competitors. And where I'd like to ultimately go with it is, as you're looking at being successful in that local market... Is it about, you know, achieving a better rate than other competitors based on where you're at? Is it about gaining more share in a particular category, like employer, that you, maybe you value more? Like, what, what is it you're trying to accomplish? And maybe as part of that, what's the context of that local market dynamic?
Well, I think healthcare in general is very fragmented. The hospital systems are less fragmented than the physician community, but we're pretty fragmented. And, you know, HCA is the largest healthcare hospital system in the country. We have 6% of the nation's market share. Within our markets, like I said, we have 27%-28% market share. Typically, we compete against local systems only. I would say, for the most part, our markets are fairly consolidated. You take, let's just stay on DFW for a moment. The top three systems produce roughly 70% market share, and then you have a few stragglers there. In order for us to compete effectively, I mean, there's not one thing that differentiates us. It's a lot of details, to be perfectly candid. We're a detail-oriented company.
We detail the market, we detail the physicians, we detail the services, and we really focus on execution. And our strategy for DFW, let's just say, is about the same as the other major systems. Now, it gets down to who can plan better, who can resource more effectively, and then who can execute on the ground, and that's where I think HCA shines. And that's what, you know, gets us to outcomes that I think are industry-leading on multiple dimensions of our business. And so we have to connect with a physician on an individual level. We have to make sure our outpatient facilities are in geographies that are necessary to fill voids if we don't have it or the geography doesn't have it.
And then we have to have, you know, technology and other capabilities downstream. But at our core, we got to produce a quality outcome. We have to be a good place for people to work, and we have to have the tools that are needed. So we're investing in all of those pieces and parts, and then executing with a disciplined mindset that gets us to the outcomes. I mean, it's not, you know, changing the world, but it's changing the world for that patient if we do it right.
Yeah, that's, that's perfect. Thinking about some of the longer-term trends and opportunities here, one of the things that's really intriguing to me, and I think has been a shift in my long-term perspective on your sector, has been the opportunities that AI might present with respect to, I'll call it care automation. I don't think that's an acceptable term, but like, the steps before that, the things that kind of enhance clinical efficiencies and things like that.
I know you guys, in addition to probably what you're doing in, in the business, some of the things you outlined at Investor Day, you know, you've got venture portfolios. You do a lot of innovative things. If you could just talk a little bit about maybe the vision of where that could go from an investor perspective, and then maybe tangibly, what are some of the things that are, you know, kind of initial stages of improving that clinical efficiency?
Yeah. Well, I'm sure I'm probably the hundredth CEO that's come to this conference and said, AI is gonna make a difference, right? And, but I'm telling you, AI is gonna make a difference in our business. And I say that, I mean, it's gonna make a structural difference in our business and in our company. And that's what we're excited about, and we think it's coming together at a time when we're ready for it. I'm not sure we would have been ready for it 5-7 years ago, but we've always known that we have another layer of capitalizing and leveraging the scale of HCA, and it starts with our data. We have the largest proprietary database of clinical transactions in the country. Maybe not as much as the NHS, but maybe because they're fragmented in their own way.
We have to tap into that, and we think the machine gives us an opportunity to tap into the patterns that we see year on year on year, with 220,000 deliveries of babies in 2022, in 2023, in 2024. We can go back even further and learn, why do we have a great outcome? Why do we not have a not-so-great outcome? What can we learn? What can we infuse into the process of delivering a baby that just improves the scenario for a mom and the child? But we have three domains that we're focused on with our artificial intelligence agenda. And the first one is administrative. We have a lot of administrative costs in our company.
Our revenue cycle, HR, supply chain, our IT stack, all of that has a lot of administrative functions, and it's gonna be easier to get at those than a couple of the other ones. And so we have an effort that includes automation, includes artificial intelligence, you know, machine learning throughout the whole administrative process to help our revenue cycle, help our supply chain, help HR, whatever. So we think we can lower our fixed costs or our administrative costs per patient as a result of that. So we're investing in those tools early and already seeing signs of some progress in key areas. The second area for us, or domain, if you wanna call it that, is operational. So our facilities operate a little bit independent of us. They have to. They're big businesses.
They have a lot of activity, a lot of processes, and so forth. So we see ways to use this technology to help us with matching up our staffing to the patient demand even better, managing the throughput of our patients more effectively, and helping us with our case management agenda, helping us with capital asset management, for lack of a better term. We also see, you know, opportunities to help our nurses in some of the administrative functions that they do. So the operational domain is a very exciting domain and one that we think we can get to more easily than the third domain, which we consider to be the Holy Grail. And that is bringing these learnings, these patterns from our database back to the decision-making that our physicians and nurses have to make on the patients.
Not supplanting their final decision, but supporting the physician in the process of evaluating the situation that they have to make effectively a clinical strategy around. And if we can bring the learnings from these patterns into an obstetrician and help that obstetrician make a better decision with better information and so forth, we think it's really powerful and can help our patients get to a much better outcome. We have a safer environment and so forth. What artificial intelligence will do for us in that domain is we have all this information in the background, in our datasets, in the medical record, and we think we can grab it and bring it to the foreground, where the people who need it in the moment can then act on it appropriately and maybe a little bit more effectively than they do today.
That super, and that's a particular area of interest to us to see, you know, how far that could reach, and you guys.
I don't think we know yet.
Yeah, I know.
That's what's exciting.
Yeah.
I mean, we talk about punching through the ceiling at HCA, and we see this tool set as our way to punch through the ceiling.
That's awesome. When you think of the applicability of that, obviously, there's all kinds of applicability within HCA. Do you also see yourselves becoming an enabler for other physicians and hospitals, or, or is this something where this would be more proprietary to you?
No, I think, you know, we, we've got to use it in our own house first and get it right. There will be opportunities to weave it into research, which is going to create societal benefits, maybe create commercial opportunities for us. Who knows? It may be that we can sell certain services down the road. I don't know yet. I mean, that's out there as a possibility, but we're not anywhere near being able to execute on that at this point.
Super. Well, let me talk to you a little bit about government programs.
Mm-hmm.
And so we'll start off with MA. I actually got a question that came in that's very analogous to my question, probably better than my question. If I could get it up here on the whole screen, I'd tell you what it was. But it's something along the lines of: How do you see MA volume trending? How... What are your relationships with.
My glasses?
No, it's the Show More button that I'm having some difficulty with. But, how's the relationship with the MA MCOs evolving? And it kind of gets to—I think there's a lot of press reports about hospitals not wanting to participate in MA. So maybe how do you approach MA? How are you seeing it? What do you see as maybe a competitive advantage you have versus other systems in participating in that? And then in general, how's that MA business looking for you?
Well, let me speak to our relationships. So we have really solid relationship with all the major payers. It's important to our relevance in our local system strategy. And there are disagreements downstream. I mean, contract negotiations aren't easy. I mean, for them or for us, we usually get to the right answer for both organizations. And then we have disagreements on actual, account adjudications that take place when the accounts are paid. In some cases, we don't think they're paid appropriately, and we have to go back and recoup that. Or if they were denied, we maybe have to battle that, "Hey, that service was needed. You're misreading the situation." So those things happen underneath, the scenario. It's a little bit like foreign policy. You have great relationships with another country's leader, but there are disagreements downstream.
That's sort of what we have here. And, and I think, you know, that's that our relationships on top have been positive because there's strategic value that they can create for us, and there's strategic value that we can create for them. So we have to keep our eye on the ball in that regard. And then the transactions have to become less challenging than they are today. And we're working with our tool set, our revenue cycle, their claims shops, and all this kind of stuff to create less friction because it's better for their member, and it's better for our patient, and it's better for our doctors. And we've just got to keep finding ways to solve that, and we're making incremental improvements. We still think there are opportunities there.
As it relates to the more contemporary issue of MA and what's going on, you know, again, we participate in just about all MA available contracts in our communities, and it's an important part of our Medicare business. We think there are opportunities for us to get reimbursed better than we do today because of some denial issues and some other challenges that are there, but that's incrementally improving. But you know, the situation with supply of beds in a lot of our markets is, like I said, lifted. And so it makes it important for the MA to have sufficient capacity available to their population. And so that's helpful to some degree. As it relates to other competitor systems, again, I think our formula is different: local system, national system.
Most people only have a local system, so we have two. And we think the one plus one adds up to more than two, and that's what's different about HCA versus the local systems. They have some differences that I think create a little advantage to them, but you know, in the end, that's a really powerful formula. And having scale is one thing, Lance, using it effectively is another, to create value for our systems, and that's how we try to create a little advantage.
Yeah. Totally, totally makes sense. One question, that's a little inside baseball, but just trying to understand from sort of a contracting and a value proposition to payers, and we'll use MA as just an example of this.
Mm-hmm.
Obviously, you know, access and your market position is real important to that counterparty in that instance. But as you work with payers in MA, is it something where, you know, the unit costs are the key point of the negotiation, or is it the ultimate outcome, and so the aggregate sort of medical impact, that is something that you're able to kinda portray as this is where you've got a superior position to others?
I think it starts with the cost.
Yeah.
We have to be competitive on that front. And so I think it starts there, and then it goes from there. I mean, we have to be competitive. We think we are competitive. We're not the highest, we're not the lowest, but we're competitive. I think that's an important hurdle to get over to finish the race on getting the contract. We do have some situations where we think our program outcomes, our quality outcomes, our offerings in a market are maybe a little bit better than somebody else's. That may influence their decision a little bit. It may influence what they're willing to pay us for that. But it's so nuanced.
I really can't speak to one item here. It varies by payer. You know, we have a pluralistic approach to payers. We have some markets that have multiple payers, and we have to respond to their needs, you know, sort of individually.
Yeah, that's perfect. Uhm , w ell, let's talk for a moment about value-based care. And I'd be real interested for you to talk about, like, what impacts are you seeing, for you as an integrated delivery system from, you know, MA value-based care, but just broad adoption, even in the early stages of value-based care on the one hand, and then what's your position as far as taking risks or doing more things? Because you obviously have the comprehensiveness to play all sorts of different roles in this.
Yeah, we haven't dove into the deep end on value-based care as far as taking risk.
Yeah.
We have a philosophy that's geared toward taking risk for things we can control and not taking risk for things we can't control. We don't feel that we have enough control over, I'll call it the system, to make it worth our while to take risk. Having said that, we have what I consider to be value-based care elements embedded in some of our contracts. Excuse me. They are related to quality outcomes, efficiency outcomes, and certain things that we can control, but it creates value for the payer, creates value for the patient, we believe, and it creates value for HCA.
So we have embedded within some of our contracts some of those elements of value-based care. But we haven't jumped to the top of the heap, to say, let's take risks for this population as a whole and hope that we have the controls necessary to really meet their needs, but also meet our needs.
So we've moved away from that as a core agenda. Now, some markets, we may nuance that a little bit because every market is slightly different, but as a company, that's not been the method that we've used to position our healthcare systems. And a lot of our doctors aren't there either.
Yeah.
You need doctors to really execute on a value-based system that is maybe what most people think. If your doctors aren't ready for it, and you try to impose that on them, it doesn't always work.
Yeah. One of the things that's really notable when you look over a long period of time at HCA, as an analyst, is how you've been able to maintain such a high percentage of employer business when, yeah—like, in the backdrop is basically the employer business out there as a sector hasn't been growing, and government has. And so you must have a position that's quite preferred to be able to do that. Can you just talk a little bit about kind of the ability to kinda get the mix that you've been able to achieve and what drives that?
So we have a very disciplined approach to understanding what's going on in the market. We segment the market. We segment the market by service, so cardiac, obstetrics, orthopedics. We understand what our market share is underneath each one of those service line categories. Then underneath that, we're exploring whether the market demand for those services was something we call in-market demand, or it came from the rural market into a major market. Because the rural market is another target market for us, because of the deficits in capacity and talent in rural America, healthcare travels to the cities, and in our communities, 18% of all demand for healthcare comes from the rural community into HCA markets, so we segment that. And then the third piece of segmentation is the commercial book.
We understand, you know, where the commercial volumes are, where the commercial market share is for HCA, what services do we need to target? So from there, we will start to build plans. Do we need outpatient facilities? Do we need certain service line development in this ZIP code or this area of the community? Do we have leakage in our system where patients are starting, and we're losing them downstream? Do we need to build up physician capability? So there's a host of things we go into to understand, you know, how to make sure we're responsive to whatever outcome we see on that market share analysis.
That's super helpful. Two more questions, because we're just about to run out of time, and I will loop in this question as well. So three more real quick questions, but the first one or first two, I'll just loop together. On the quarterly call, you talked a little bit about some of the dynamics of redetermination, shifting people over to individual, maybe some impacts on demand because of more out-of-pocket or things like that. Can you just talk a little bit about maybe the overall environment as far as coverage? Are you seeing any issues as far as bad debt or things like that? And then are you seeing different dynamics as far as utilization in different segments? As you know, Medicaid performing you know, more utilization than expected. Individual, you commented, seemed like you know, there's a little more reticence in utilization in that space.
Well, let me start with this. I think this is an important factor. Our payer mix has improved over the last year and a half or so, and it was improved in the first quarter. Some of that improvement was, you know, growth in jobs, where people got employer-sponsored healthcare. Some of it was due to growth in the exchanges, which improved our payer mix. We did see some of our Medicaid volumes decline because of the redetermination that some states were going through, but we think a number of those individuals landed in the exchange or maybe even back with their employer.
So our mix as a whole is stronger, and that's helped our organization over the past year, year and a half. We think that's gonna sustain itself through the rest of this year, that we have a solid payer mix. We made a comment on the first quarter call that our outpatient surgery volume was a category that wasn't up like the rest of our business, and a lot of that volume decline was in Medicaid, which we attribute a little bit to Medicaid redeterminations. One would have thought that it would have behaved like inpatients maybe or emergency room visits, and on our commercial side, we didn't see the same kind of growth.
The working theory, we don't know if it's right yet, is that now those people have a copay, whereas in Medicaid, possibly they didn't. And, as we see with our outpatient surgery business, it's heavy in the fourth quarter, and the working theory is that maybe that was deferred until their copays and deductibles get saturated throughout the year. We don't know that yet. We don't think there's anything in our outpatient surgery business that's structural, that's disrupted demand in any way.
Gotcha. That is real helpful. Last question I'll fit in here, just came in, and it was one of our last questions. As the long-term impact of GLP-1s, but kind of drug innovation, and what do you think that does for volumes long term, and how far is long term from your perspective?
You know, I don't know that we know enough about the effects of the GLP-1s. I was just actually talking to a CEO yesterday, and they were telling me that their belief, and I know this to be a fact with some of our orthopedic surgeons, there are some patients who have BMIs that are so high they can't get a total joint knee replacement. So a GLP-1 drug may help that patient lose weight but now be eligible for... So I don't know if it's additive or subtractive to demand, and my only reference point are statins.
And when statins were introduced, we were answering the same questions we're answering now about GLP-1s, about, "Oh, you're not gonna do any more cardiac care, Sam." I'm like, "Well, we're doing more today than we've ever done with more people on statins." So I think GLP-1s are a great thing for people in general. I don't think it's gonna be that disruptive to our business, and part of it, Lance, is we're so diversified. We're diversified geographically as a company. We're diversified at, from a service line standpoint. Not one service line produces more than 15% of the revenue of the company. Not one division of HCA produces more than 12% of the revenue of the company, or 15%, somewhere in that zone.
So we've got this diversification that something else will be growing if there's a little bit of an impact because of a new drug that's put out there.
Perfect. Well, I want to thank everybody for attending this. I really appreciate you taking the time, both for the Fires ide Chat and the meetings, and congratulations.
Thank you very much.
Look forward to the rest of the year.