With CEO Sam Hazen of HCA Healthcare, as well as Vice President of Investor Relations, Frank Morgan. Guys, thanks for joining us virtually today.
Thank you, Andrew. I appreciate your understanding on the rationale for everything.
Absolutely. Glad we could accommodate. There is a lot going on, a lot of attention on Medicaid reform and provider taxes from Congress and investors lately. It'd be helpful, Sam, to get your perspective on the direction that the policy discussion is taking and how you're thinking about the risk, not only to HCA, but also the broader hospital industry.
Andrew, obviously there is a lot of discussion in Washington, primarily around healthcare policy. We have identified it as an organization as our number one enterprise risk, just because there is uncertainty and there are vagaries with respect to what the Trump administration has put out as far as their healthcare policy. There are three categories that I would say are on our radar. The first category with respect to policy is a known fact, and that is that the enhanced premium tax credits that were passed during the COVID pandemic are due to expire at the end of 2025. We believe there is good rationale for the government to want to continue those, refine them where they need to be refined, yes, but to continue them in a way that ensures coverage continues for many family members who are out there, families and individuals who benefit from the exchanges.
We're working that. There's receptivity to the discussion. There's still a lot of time between now and the end of the year. That's one category. The second category, as you mentioned, Andrew, is Medicaid. There have been discussions about the need for Medicaid to be reformed in some regards, adjusted in possibly others. It's really early in what that means. I'm actually in D.C. this week and trying to gain a better perspective on what certain legislators are thinking around Medicaid and maybe some pathways forward that would be appropriate for Medicaid programs, but protect the industry in a way that the industry needs to be protected. The third area for us is clearly around what happens with Medicare and are there any particular changes to the regulatory environment or the reimbursement environment there.
We have three areas of focus with respect to our government affairs agenda. We are spending a lot of time trying to both educate and make legislators and administrative people aware of possible options to achieve certain objectives and not necessarily do any significant damage in the process. I will say it's still very early, Andrew. For us, our big focus is on maintaining coverage. We think that's good for communities. It's good for provider systems. It's really good for overall population health. Without coverage, the system really breaks down for families and individuals. We are promoting the idea of coverage being a priority, obviously appropriate reimbursement being the second priority for us.
Great. During any period of stress, whether it be COVID, natural disasters, policy, HCA has shown remarkable resilience. How does that shape your thinking around potential reform? What are some of the resiliency efforts we might see should any of these unfavorable policies unfold?
We have developed, I think, I'll call it a quiet confidence with respect to being able to navigate through difficult periods of time. We did that, as you mentioned, Andrew, with the pandemic. We challenged ourselves going into the pandemic with coming out on the other side being a better organization than we were going in. We think we achieved that. We think we achieved it organizationally. We have a better structure in our company. We have our culture that's been advanced on how we dealt with people. I think the reputation with key stakeholders has been improved. Organizationally, we positioned ourselves for that. The reason I talk about that is organizational resilience, I think, is very important in whatever circumstance you're having to deal with.
We have demonstrated, I believe, an ability to keep our organization structured appropriately and aware of circumstances and prepared to deal with the reality, whatever the reality is. The second area for us is really around operational resilience. By that, I mean what areas of our operations can we improve today or put on sort of a directional course to advance in a way that's going to keep our business where it needs to be? Technology is a piece of that. How do we infuse more technology into our business to make it more effective, more efficient? How do we create better asset management through throughput and capacity management? How do we think about capital allocation possibly slightly different? All those things, I think, play into operational resilience. I do not think it changes our core model. Our model is built on servicing demand for healthcare.
We continue to believe that demand is going to be there and be strong. We said that at our Investor Day a couple of years ago, Andrew, that we saw long-term demand for healthcare in the 2%-3% zone per year. The third area is financial resilience. With financial resilience, we've improved our balance sheet significantly over the last five years. Our balance sheet's in the best position it's been in in a long time. That provides a platform. In addition to that, we're looking at cost initiatives that we can execute on that will give us a response, if you will, to coverage dislocation or to reimbursement changes and so forth. We're looking at where do we have redundancies in our organization? How can we benchmark against best practices a little bit more? What does technology do to our efficiencies?
Again, case management and asset throughput management all play a part in that. Those are some things that we're doing to develop resiliency. It is more than just one item, Andrew. It is broad-based resiliency, I think, that is necessary. We are drawing upon some of the lessons, again, that we learned during COVID and carrying those lessons forward around transparently communicating with our key stakeholders, making sure people understand our priorities, and then executing with purpose and speed to get to outcomes. That is who we are as a company. We will deploy those traits to deal with whatever comes at us during this uncertain period.
Sam, you mentioned the three areas of focus on the policy front: ACA, Medicaid, and Medicare. What exactly did you mean by Medicare? Is that in reference to site-neutral reform? If so, what are you monitoring from that perspective?
I think that's the main area, Andrew, that's out there. The Trump administration said they're not going to touch Medicare. We don't know what that means exactly. Does that mean from a beneficiary standpoint? Does that mean from a provider standpoint? Does that mean from a Medicare Advantage payer standpoint? We don't really know what that means yet. There have been discussions about site-neutral payment reform. That has some implications. There are different versions of that. There's what I'll call a light version where it has a very small impact on HCA, has more of a broader impact on academic medical centers and others. There are medium impact items depending. Then there are ones that are heavier impact for us. That requires significant change in philosophy within the Medicare program. We don't see a high likelihood of that.
We think we're somewhere in the light to medium kind of sort of implications with site-neutral as a possible item for Medicare reform. Again, it's really early. I don't even think Dr. Oz has been sort of approved yet as the administrator. There's not really been a lot of effort at this particular juncture.
Great. Tariffs are another issue currently being contemplated by the administration. How do you think about the risk of that for your business? Do you have enough visibility into where your supplies are sourced to measure the potential risk?
We do. We went through some level of tariffs in the first Trump administration. That forced us to rethink aspects of our supply chain. We started to diversify our supply chain vendors a little bit with that particular cycle of tariffs. We have locked down most of our supply contracts for the near term, where we have very little risk with respect to pass-through costs related to tariffs within our supply chain partnerships. In the intermediate run, that could become a negotiation if, in fact, there are sort of sustained tariffs. We have some flexibility domestically to reposition some purchasing here and there. We are in sort of an effort to understand, okay, where are the risks within our supply chain and how much exposure exists? I do not know that we know.
It's fairly fluid, as you know, with these tariff policies that are being discussed. It has some implication with our capital projects. Fortunately, most of our steel is sourced domestically, so we don't have a lot of steel tariff exposures. Andrew, it's fluid. We have some protections in the contracts that we have today. We have some protections with respect to domestic producers that provide supplies and certain equipment needs for us. We have contract control that will give us some near-term relief, but we'll have to deal with maybe some intermediate pressures if these tariffs sustain themselves.
Great. Let's move on to the fundamentals. Over the last two years, HCA has been able to deliver 4.5-5% same-store adjusted admissions growth, which signals elevated demand in a post-pandemic world. What are the fundamental drivers of that demand? What gives you confidence that volumes can be sustained in the at least 3%-4% range?
We have guided this year to a higher level of volume growth in our markets than what we had anticipated long-term, a little bit less than what we actually experienced in 2024, but still above our long-term guidance. I think when you pull up for HCA, Andrew, I think you have to start with the fact that the portfolio of markets that we have in our company are markets that have inherent growth attributes. They have better than national average population growth trends, number one. Number two, we have aging baby boomers in our markets as far as being retirement communities and so forth. That is driving demand. Unfortunately, chronic conditions still exist in the U.S., and it lifts demand. Currently, we see those three factors driving demand at at least our long-term guidance and possibly more.
Now, we need to get through this year and understand whether or not our assumptions still hold for 2026 when you start thinking about some of the federal policy dynamics that are out there. I think one aspect around coverage that's important, and I've mentioned this before on our earnings call, coverage, we believe, creates a little bit of a lift to demand. The more people who are covered, the more likely they're going to get preventative care, diagnostic care, and so forth. That lifts up demand slightly. That's why coverage, we think, is very important to families, community health, and really the demand equation inside of our space. Those three areas, population growth, aging baby boomers, and the chronic condition situation provide us with confidence that our long-term growth prospects are where they need to be.
Possibly with coverage, if it's maintained, we could see a little bit of elevated demand with respect to that long-term guidance.
Great. Throughout 2024, we saw an acceleration of high-dollar cost treatments across the healthcare system, including specialty drugs, advanced imaging, and infusions. What's been your experience as it relates to this? Have you seen an uptick in higher acuity patients or procedures that's consistent with that trend?
Yes, is the short answer. This has been something that's been sustained over, let's just say, the intermediate run. If you look at where our case mix index, which is a proxy measure for our inpatient acuity, representing sort of the sickness severity of our patient population, it's grown, I think, 5% or 6% since 2019. Frank can correct me if that number's off, but it's been a fairly sizable increase. That was particularly elevated during COVID. We were thinking, to be perfectly candid, that it might back up a little bit post-COVID, but that's not been the case. It's sustained itself and actually grew this past year modestly over 2023. Some of that is a function of our strategy, where our strategy is to continue to build out more complex service line capability.
That is with investments in clinical technology with certain physicians, with using our network, Andrew, to create demand for more complex care and fundamentally keep the patient in the system if we can and be all things to all people. That has resulted in program development in Level I or level II trauma, program development in bone marrow transplant. I am just giving you examples. All of this yields in sort of the main for HCA Healthcare a slight lift in complexity of service offerings. The other thing, Andrew, that I think is very important to understand is demand for healthcare in the rural parts of America continues to grow just like urban markets, maybe not at the same level. The ability for people to supply healthcare in those markets is diminishing and denigrating. What that is doing is pushing rural demand into urban demand.
For HCA, about 18% of all of our admissions come from rural America into our facilities. Typically, those are patients who are sicker. The acuity of those patients is above average, and it drives a bit of complexity into our facilities as a result. The last thing I would say on this is some of the lower-level stuff gets moved out to outpatient or managed by drugs. You have a little bit of a push away on the low end. You have program development demand from the rural markets, aging baby boomers driving up complexity. For us, that means more revenue per patient. We are a fixed-cost business. When you are generating more revenue per patient, it generates a greater absolute contribution margin, and we wind up dribbling that down to the bottom line, hopefully.
That is how the model works for us. We have the same asset base in most instances. It produces a really positive return on capital when we are able to execute on that and deliver that kind of service for our communities and for our facilities.
Right. Despite that higher level of acuity that we've seen, you've made some really nice improvements in average length of stay. Although a lot of things can impact that number, including acuity, productivity, and post-acute readiness. What's been the primary drivers of that improvement? Where do you think that number can go near term?
I think the primary driver has been what I alluded to earlier, and that is better execution. We have been focused on it as a team. We have invested in technology. We've reorganized to what we call a support model approach to case management. We're using AI in some cases to help predict what patients might go to skilled nursing, what patients may go to home care, which patients are likely to go to home so we can interact with them with a head start. All of that helped us achieve better average length of stay on a growing acuity base. We still have room to go. We have wide variation in execution in our company today. We have some best-in-class performers that could produce 10-15% better performance if we could replicate that across the company.
That's not easily done, but we're trying to leverage how is that facility or group of facilities organized, what systems do they have in place from an execution standpoint, and how are they approaching accountability to get to that result, and how do we transport that to another 150 hospitals or whatever the case may be. Those are things we're working on. We need to work with the Medicare Advantage payers, and we are in helping to deal with the variances that we see in the same type of Medicare patient versus a Medicare Advantage patient. I want to say it's 20%-25% less efficient for us with a Medicare Advantage payer in getting them either home or into a post-acute setting. We're working with them to try to address those variances.
That would be a very helpful and accelerating area if, in fact, we could accomplish there what we've accomplished for the traditional Medicare beneficiaries.
Great. Moving on, HCA has dealt with a number of hurricanes over the years, including Katrina, Harvey, Irma, and most recently Milton. How would you compare and contrast Milton versus some of those previous experiences? What is the latest on the recovery efforts underway at Mission Hospital in North Carolina?
Let me speak to Hurricane Helene, which was roughly two weeks before Hurricane Milton. Andrew, it was a redux of Hurricane Katrina. I was on point for HCA in 2019, when it was 2005, with Hurricane Katrina. Three weeks later, we had Hurricane Rita, which hit Houston really hard. This year, we have Hurricane Helene. I told my wife on Saturday, I said, "Oh my goodness, this is Hurricane Katrina all over again." She's like, "What are you talking about? It's in North Carolina." In the same set of circumstances, because we lost power, water, and sewer, we were like, "Oh my goodness, we're going to have to evacuate a hospital with 750 patients in it." That was Saturday. On Wednesday, we had drilled three wells.
We had worked with our water vendor, and we were fortunate enough that we were connected to a sewer treatment facility that was not devastated. We were able to go from crisis mode to, I'll say, stability in less than three days through the efforts of our team. We drilled three wells. I mean, it was an unbelievable effort. The devastation in western North Carolina was like New Orleans, especially as you move deeper into the mountains. We have five hospitals in the rural counties. Those hospitals have come back a little bit. We are still trying to understand what is happening with population in the rural parts of western North Carolina. In Asheville, which is where our Mission Hospital and other facilities are, we are as busy as we were pre-pandemic. The community, from a healthcare standpoint, has recovered.
What we do not understand, though, Andrew, is that rural healthcare coming to Asheville, or is it Asheville City demand being what it was pre-pandemic? There was such devastation to road infrastructure, homes in certain cases. We were not sure what the employment environment was going to be like in Asheville and so forth. It is still too early to call that. We are in a good spot. Our hospital is functioning fully. Our outpatient facilities in Asheville are functioning fully. Our behavioral health and rehab facilities are functioning fully. We are a little bit ahead of where we thought we might be with respect to the Asheville recovery. It is too early to call what I call the macro conclusion on what overall population trends are going to be in Buncombe County and how that is going to affect our business more in the long run.
Great. If I'm hearing that correctly, it sounds like occupancy is ahead, but you might be pulling from rural areas such that payer mix might be a little bit of a headwind. That is what we should look to improve over the coming months.
Yeah. I mean, you got to understand, I mean, that's one hospital inside of 190 for us. It's meaningful in one sense, yes, because we have fundamental responsibility as infrastructure to be there and have services and availability and capacity as best we possibly can in a regulated state to meet the needs. We're trying to do that with length of stay management, staffing, all the things you would expect. Yes, those are the things we're studying. It's early. Our teams have done a wonderful job. It appears that maybe there could be a recovery that's a little bit ahead of what we thought.
Great. Sam, last year at this conference, we heard from one of your regional leaders down in Florida about your relentless focus to capture a 30% market share by 2030. Where does that market share sit today? What do you think is needed from an operational and investment standpoint to drive that outcome?
I'm really proud, Andrew, of our teams. At the end of 2019, before the pandemic, we were about a 27% market share. The most current data we have today puts us at about 28%. We picked up market share through a very dynamic period with the pandemic. It was hard to really understand market share during 2021 and 2022 because we had COVID surges that we were dealing with. Those would come and go from one hospital to another, not just in our system, but competitor systems. Here we are at 28%. We're also in a situation where we've added to our competitive positioning. Our competitive positioning is better than it was pre-pandemic. We've added outpatient facilities. We've bought some outpatient businesses. We bought a few hospitals during that time period. We continue to invest heavily in who we are.
Developing our networks is one of our primary objectives as a company in expanding the capabilities of our networks and creating even greater access. You see us, Andrew, adding a lot of outpatient facilities to our network. I think we're up to 13 or 14 clinics or facilities to every hospital. We think we're going to be pushing 18-20 by the end of the decade just because we want to take the care closer to the patient, make it easy for the patient to interact with the system, have different price points for the patient, but ultimately start them somewhere in the HCA system. From there, we want to integrate our networks very tightly so that if a patient does need more acute services, we're back to the complex service offering, we can provide that care somewhere in the HCA system.
We're investing in that piece too. It's requiring us to invest capital in our hospitals as well as our outpatient footprint to advance beds. I mean, we're running the company today, Andrew, at roughly 73%-74% occupancy, which is almost a high watermark for the company. That's on 42,000 beds or so. Very significant utilization of our beds. We need to have capacity available in order to treat the demand that we think. We're investing in our organic model. That means building out the networks that we have today, taking advantage of population growth, overall demand growth, and the position and brand that we already have, and extending that further into these communities that are growing. I mean, I'll just point to DFW as an example. There's 8.5-9 million people in the healthcare market for DFW.
In the next 10 to 15 years, we think it's going to grow a million to a million and a half people. We have 22% market share in DFW, 23% somewhere in that zone. We can push into that growth and have substantial growth in that division for our company. I mean, I could point to Austin, Texas, Salt Lake City, Las Vegas, all of Nashville, Tennessee, same dynamic. I'm back now to our portfolio, having this built-in sort of demand that's inherent in most of the communities that we serve, and using that and using our existing position to invest capital, we think in a very conservative way, a very predictable way, and one that's been reliable for producing solid returns and still continue to accomplish the objectives we want. That, we believe, with deep execution, can get us to 30% market share.
Great. With that, we are out of time. Sam, really appreciate all your thoughts in a dynamic environment here. Everyone in the audience, please enjoy the rest of the conference. Thank you.
Thank you, Andrew.