All right. Good afternoon, everyone. I'm Steve Baxter, the Healthcare Services Analyst here at Wells Fargo. We're very pleased to have HCA Healthcare with us today. HCA Healthcare is one of, if not the largest, operators of health systems in the country. From the company, we're pleased to be joined by CFO Michael Marks. Thanks again for being here.
Sure.
Any opening remarks you'd like to make, or are you ready to just kind of get right into it?
Dive in.
Okay. Great. Maybe we'll start, you know, on the demand environment potentially before we move into maybe some of the, you know, the EBITDA performance in the year, and then maybe on some policy topics too. Just thinking about, you know, demand trends that we've seen so far throughout the year. Obviously, there's going to be some natural level of variability in your business. I think people have gotten accustomed to that over time. I think one thing that definitely stood out, you know, across the group was maybe a little bit slower volume growth that we saw in the second quarter. You called out Medicare and Medicaid in particular as maybe being a little bit weaker than you might have thought going into the year.
I guess, could you just expand a little bit on, you know, the volume trends that you saw kind of moving from Q1 to Q2 and how to think about some of the key moving parts there?
Sure. As we started the year, as you recall, we thought 3%- 4% would have been of the volume growth that we expected for the year. You know, we have finished the first six months at 2.3% equivalent admission growth. We're a little bit short of our original guidance. I really break that into three components, from a payer perspective, and then we can kinda end with a bit of demand overall. The first one really was Medicaid.
Medicaid, we're down 1.2% through June year to date to prior year. We had originally thought that would be at least flat, if not even up a little bit. That's really around timing coming off of the Medicaid redetermination process in 2024, and we just have not seen the pull-through that we thought. It's a little bit short. You know, when you think about it, that's about 17% of our volume. We're off about a point. It's a piece of the story. The other one that's interesting is uninsured volume. I mean, our self-pay volume is only up 1.5% year to date.
It was less than that in the second quarter. We typically think of our uninsured or self-pay volumes tracking with the overall volume growth. We would have thought that would be in the 3% to 4% range. It's half of that. Medicaid and self-pay combined are a big chunk of why we're short, and those are our two lowest reimbursing payers.
Yep.
That speaks to why we still produced a, you know, a 6.4% top-line growth.
Yeah.
In the quarter, which is strong. The third one you mentioned is Medicare. Coming into the year, especially after, you know, 2024, we would have put Medicare in the 3.5% - 4% range. We're coming in at 3%. It's just a little bit lower than our original estimates. The only thing I might say, overall, if you put that 2.3% growth in context.
Yeah.
Remember that last year was strong. I mean, it's a tougher prior year comparison, and then there's also a 50 bps leap year impact. You know, leap year. Last year, not this year. When I kinda boil that into a summary thought, I mean, it feels like we're kinda in the range of our long-term plan of 2 %- 3%. When you take the prior year comparison into account, maybe even the middle to upper range of that. That's how it's looking as we start the year.
Okay. I think one of the things you discussed that I didn't fully appreciate was the impact, I guess, of the exchange growth that you saw last year, I guess, on the comparison. The comparison got a lot harder, I think, as you got to the second quarter of this year. Is that the right way to think about it when I look at the first quarter versus the second quarter of this year?
It is. It's really interesting. Now, I always like to put it in context. I mean, last year had a big enrollment growth in the exchanges.
Yeah.
In our states, the enrollment growth was almost 40% +. Th ere was a robust volume growth in 2024 coming from that exchange enrollment. When we went from first quarter of 2024 to second quarter of 2024, we saw almost a 15% increase in the exchange volume, sequentially.
Yeah.
This year as we went from first quarter to second quarter, we had a 3% growth s equentially. S ome of that also is just the difference in enrollment. This year, in 2025, our enrollment growth in our states was more like 13%. It's our growth year to date to prior year in exchanges a t 15% is still good. I mean, that's still healthy growth, not nearly as good as it was last year.
Yeah. Okay. If we were to look at, you know, and remove maybe the exchange, you know, contribution to volumes the past couple of years, as we contrast maybe where things are for the commercial exchange book, I guess, how are trends there in the first half of this year? I guess, maybe help us think about what that looks like compared to the past couple of years.
Sure. When I think of our commercial book excluding the exchanges, t hrough the first six months, we were up just short of a point.
Okay.
In a normal year, if you go back over the last several years, you would say 1% - 2% growth on employer-sponsored insurance, kind of the commercial book broadly.
Yeah.
Excluding exchanges would be a normal level. The way I contrast it, and I'm just going to stick with kinda June year to date, you know, we were up, you know, call it 4% or 4.5% on total commercial book including exchanges. The exchange volume was maybe a little better than we anticipated, and the commercial maybe a little bit lower than we originally anticipated, but not terrible. I mean, at just short of a point, you know, not way off.
Yeah.
Our trends, you know, a 1% - 2% growth over time fits within our long-term plan of 2% - 3%.
Okay.
Yeah.
Okay. Perfect. Just thinking about the range of guidance that you have, it seems you stay at the second quarter level, maybe tracking closer to the low end. If you see more like the first half performance or maybe tracking in the midpoint, if you get some improvement, you could be kinda skewing towards the high end. Is that the right way to think about it? I guess, how do you think about the comps in the back half of the year as well?
Yeah, it's, there's a lot of moving parts.
Yeah.
In 2025 for the company, let me mention a couple of them.
Yeah.
I'll conclude with how I think about the second half of the year versus the first half.
Keep in mind that, you know, when we raise guidance, we agree, we raised guidance $300 million at the midpoint of our guidance range. About $150 million of that was from the state supplemental payments. From a timing perspective, the way to think about this is, we had a $180 million net benefit in the first half of the year. In the second half of the year, including the new Tennessee program, we're expecting about a $130 million decline in state supplemental payments. That is a little bit of the difference between first half and second half.
Yeah.
The second thing would be the hurricane markets, and kind of the overall portfolio.
Yeah.
The hurricane markets, you know, we think now as part of that $300 million raise, that they're going to be $100 million better.
Yeah.
You will see that, though, kind of be a bit negative in third quarter. With that pickup pretty much happening in fourth quarter, based on the timing of the hits in 2024.
Yeah.
With hurricanes, there's a lot of moving parts in there.
Yeah.
When you take all those into consideration and you look at the midpoint of our guidance, I think the implied growth rate in the second half of the year is pretty consistent with the first half of the year.
Yeah.
When you consider.
Yeah.
The timing of state supplemental payments, the timing of the recovery on Medicaid and the like. That's how we view it.
Okay. Got it. That makes sense. Granted, there are a lot of moving parts. If we were to kind of strip it back and think about maybe removing some of the, I don't know, maybe the less core items of the hurricane markets and some of the incremental Medicaid dollars that you're receiving this year, I guess the EBITDA guidance is up around $50 million if I net all the moving parts out. How would you characterize the first half of the year and the core performance and what's driving the upside, even given the fact that volumes are maybe a little bit softer?
The only thing I would note on the $150 million increase to guidance is kind of in our operations portfolio. $100 million better on the hurricane markets. We have a couple of markets that are performing below our expectations. There's about $50 million, and then the rest of our markets are performing better than our original expectations. It's the net of those three items that kinda net to that $150 million improvement to guidance. When I think about broadly this year, you know, our volumes are a little bit lower than we thought they would be.
The payer mix and the consistency of our acuity and the like, our net revenue growth has been good. We think that's a good marker, and it's part of why we were comfortable raising our guidance around our portfolio. On the cost side, if you just look at our performance through the first six months and what we're seeing in labor and supplies and our operating expenses, we feel like we've got momentum as we go into the second half of the year. Again, it was a part of what drove us to increase the guidance for the full year.
Okay. Yeah. Maybe on the cost side, you could just expand a little bit on what you're seeing, I guess, for labor. I mean, it feels like, you know, the data is a little bit harder to track, but looking at things like, you know, quit rates, for example, in the healthcare industry, it looks like those are kind of continuing to decline, which could have some favorable leading indicators for where labor is going. Do you feel like you're seeing that translate through to your wage trends?
When I look at labor through the first six months, we're in a pretty stable operating environment.
I think you're seeing that. Our wage inflation is coming in exactly where we thought it would or really close. We're continuing to see improvement in our use of premium labor. Contract labor now is down to 4.3% of total SWB. You go back to pre-pandemic levels, that was at 4.1%. We're getting pretty close to where we were in a pre-pandemic level. Our retention of staff, of hospital and clinical staff.
It is really good. It's basically back to pre-pandemic levels, which is great. All the work we've done with workforce development, you think about the Galen School of Nursing, you think about all the work we've done with the other nursing schools and our graduate medical education programs for doctors, those investments have paid off. I do believe we're in a bit of a stable operating environment on labor. I think you're seeing that in our financial statements. It's a result of a lot of work from our management teams. That's number one. The one component of labor, and I'm going to call it labor broadly, is physician cost.
Yeah.
Professional fees, which is contract labor, mostly on the hospital-based physician side, continue to run a little higher.
Yeah.
We're at about 10% same facility profit growth in second quarter, which is, you know, more than double the rate of kind of normal inflation. It's kinda interesting, that's a hotspot for us, but it's better than it was in 2024.
Yeah, of course.
It is better than it was in 2023. All the work we've been doing, I'll call out Valesco as an example to stabilize that segment of our business, that's paid dividends. It's still under pressure at 10% growth. We're seeing that now more in anesthesia and radiology, and a little bit less in hospitals, which is good. We've still gotta work through that. There's still challenges there that we're working through on that segment of our business.
Okay. Any early thoughts on how that could, you think that's persistent, these pressures? Do you think that's realistic they could go back to 5% or the pre-COVID towards the norms over the next few years? How do you think about the realistic path forward here?
I think about it in terms of, by segment.
Yeah.
I think we have made a lot of progress in the emergency room and hospitals. That investment we made to insource Valesco and really invest in that has paid dividends to that end. We've got work left to do in anesthesia and radiology. I'm not quite ready to give 2026 guidance.
Right.
I don't think we're ready to say that you'll see profits go back to normal levels in the next year or so, for sure. We've got, that is the one segment of our cost structure that's still, that we're still working through. We're working hard at it. I mean, our operating teams, our Clinical Services Group colleagues, we have a massive focus to stabilize that workforce, and I think those efforts will continue to pay dividends. We are not through it yet.
No, thank you. Just to talk a little bit on the policy side of things, I guess the most, you know, seemingly front and center issue is the enhanced exchange subsidies. Obviously, you know, the industry continues to have optimism that at least in some form or fashion they could potentially get extended. To the extent there's any kind of update on how the company's message is maybe resonating with policymakers, we'd, of course, be interested to hear about that. I guess just at this point in time, we are getting somewhat closer to the end of the year. At some point, you might be in the position where you need to provide guidance that factors in some kind of assumption around exchanges. Do you feel like you are close to knowing what you would need to know to develop that kind of estimate?
I guess, where do you stand in terms of the level of uncertainty here?
think we are going to have to see what happens with EPTCs. Do they get extended or do they expire? You noted this, but I am encouraged that there is some momentum here in terms of a growing understanding of the importance of EPTCs to these 24 million enrollees across America. A lot of these enrollees are in non-expansion states. A lot of these are in Republican states. These folks, the impact if EPTCs don't get extended are real.
I think the legislators, the president, the administration, you know, I think appreciate that this is something that has to be considered. Now, I don't know if they're going to get extended or not.
Yeah.
We will see here over the next several months what happens. Before we are going to be ready to size it specifically, we are going to want to get a little bit more understanding of what happens with EPTCs. You could anticipate that on our fourth quarter call when we give 2026 guidance, we will give you our best thinking on what EPTCs, what is going to happen, we believe, and what the impact will be, and also what our resiliency plans are. How much of those, should they expire, how much of that adverse impact we could offset through our resiliency efforts.
We got to get through third and fourth quarter here. We got to see what happens in Congress, and then on our fourth quarter call would be when I would expect you'll get more information.
Okay. We'll be patient. As we think about just trying to better understand the way that exchange patients interact with your health system, what's the best characterization of how they use the system? Are they potentially using more emergency care than potentially your average employer-based utilization? Are they using fewer elective procedures? How are they using your system? How do we just think about their relative performance or sort of volume contribution versus maybe someone who's sitting in the employer bucket?
Let me start just as a note. The healthcare exchanges are about 8% of our volume and about 10% of our revenue. When I think about how they perform and how that population kind of engages with hospitals and health systems, it's a little bit between commercial and Medicaid.
Okay.
They are not exactly like the commercial population. They do use a little higher. Their utilization of elective care and the likes is a little bit lower.
They are not nearly like the Medicaid population. Right. They're closer to the commercial population.
With just a little bit more utilization would be how I think about that. It's not exact. The other thing I would say from a reimbursement standpoint is that healthcare exchanges are our second best payer. They're between commercial and Medicare and closer to commercial. When you just think about the contribution to HCA Healthcare, think about it across that spectrum.
Okay. No, that's great. Through the first half, there's no interquarter update that they've given.
Okay. Yeah, we do not give interquarter updates.
Okay. Clearly clarified in case. As we think about Medicaid supplemental payments, the other, you know, sort of key policy issue, I guess, you know, first, we've, you know, it's good to see that a couple of the outstanding ones that we've been waiting for for some time, like Tennessee, you know, we've gotten clarity what's happening there. Obviously, there's been a lot more recent focus on trying to figure out whether, maybe previously submitted applications are going to kind of get across the finish line, and maybe go into the baseline before some of the grandfathering provisions kick in here. What's the company's latest thinking on where you are in Medicaid supplemental payments and whether it's realistic to think that there potentially could be, you know, more here before we have to start thinking about, you know, things that are out further in 2028 and the provisions in the OBBBI?
The One Big Beautiful Bill Act included some grandfathering provisions.
Yeah.
Including good faith efforts. Many of our states, several of our states have applications on file that are being reviewed, consistent with that language. We were encouraged just in the last few days that Texas got approved. That's encouraging. It's a good sign that CMS is reviewing these applications, and it seems to be in pretty normal order.
Yeah.
Here under the grandfathering rule. That was a good sign. We were encouraged by that. There are several other states that we're aware their applications are also being reviewed. I don't like to predict the future, and they're not approved until they're approved.
Yeah.
It's encouraging, is what I would say.
Okay.
The one that we've mentioned before that I'll mention is Florida, which would be the largest one that we're tracking. We believe it is under review. That's a good sign.
Okay. Good to hear. As we just think about, obviously, the resiliency efforts that you've talked about in response to any kind of potential headwinds, either from the exchanges or maybe down the road, as we think about maybe, like, Medicaid a few years out, I guess, what are the key sources of potential value there? I guess, how flexible is the company's, you know, sort of ability to kind of pull and push those things out according to where the headwinds might sit in a timeline?
When I think about our resiliency program, I really break it into four main themes, or kind of domains of work. The first one is around revenue integrity and really fighting through the denials and underpayments and trying to do our very best to collect our revenue for the services we provide under the contracts we sign. That is one of our four main areas of work, to try to do as much as we can to fight through the denial trends. Second would be asset utilization. It's really important. The hospitals are capital-intensive enterprises, so things like improving our inpatient length of stay and throughput, emergency room throughput, operating room throughput is critically important from an asset turn standpoint. We have a serious set of initiatives in our resiliency plan to improve our throughput, including our length of stay on the inpatient side.
The third is all about variable cost. If you think about labor, supplies, and some of our operating costs are variable. We have a very robust stream of initiatives that over the last 12 to 18 months, we've both accelerated and enhanced.
Including trying to identify new items here over the last year or so, those actions are identified and there's work going on to implement and get those into our processes. Really, the fourth one is fixed cost. If I think about our corporate, our SG&A cost, our operating platforms, like our shared service platforms, a lot of work over the last year to identify opportunities to get more efficient and to push those. We have a robust plan. Again, on fourth quarter call, we'll give more insight into what we think the savings from those initiatives could be to help deal with the potential impacts, especially if EPTCs don't get extended.
Yeah.
When I think about what drives those plans, I really kind of think of it in three ways. The first one is our benchmarking efforts. We have robust benchmarking efforts both externally to other Fortune 100 companies and at the hospital level, helping our hospitals benchmark against each other. We're finding great value in benchmarking that, identifying best practices and helping hospitals and our shared services really advance their performance. The second is digital. We have a lot of work in flight with AI, with machine learning, and with automation, that we think are really a big part of our resiliency effort. Those efforts are going well. You'll see the digital transformation being part of what drives our resiliency effort.
The third is our shared service platforms, which are well established and mature, but we are adding additional functions to our shared service platforms to get scale to a broader part of our operating environment. Those expansions into other components of our business continue to go well as well. I feel good about where we sit here today on our resiliency plan. Again, more insights to come as we get a little closer to the fourth quarter call.
Maybe just to touch on, you know, some of the revenue cycle items, those are very interesting topics at the moment.
Yeah.
Could you talk about what you're seeing there? Obviously, adoption of some of these advanced technologies, I'm sure, are helping either that business become more efficient or improve the yields. I guess, how are you seeing that translate for the business today? Is it resulting in fewer net denials at the end of the day? What results do you think you're getting out of those technologies now?
It is really the combination of investment in people. Investment in process improvement and technologies. On the technology side, it's AI, but it's also just automation and software development to just become more effective and more efficient in our work. I would really kind of break it into two or three components. The first one is really using technology and processes and investments in people to do a better job in adjudicating claims and reducing the impact of denials and underpayments on the business. We've been working on this for the last couple of years. We've been talking about this on our calls.
Yeah.
I think the results of that work have been allowing us to process denials more effectively. When a denial comes in, making sure that we understand the root causes of the denials and that we organize our effort to ensure that we're appealing those, and if we have to, that we're taking those all the way through dispute resolution.
If we think that these are accounts that we are actually owed the money for.
The results of that work have really helped us deal with the growth in the denial trends that you've seen over the last several years, including this year. Because of that, as we sit here today in the first half of the year, denial trends from the payers have not really had a negative impact on HCA Healthcare. I say that because of our response.
Yeah.
I have not seen the, you know, kind of reduction in the activity levels as much as I think our efforts to make sure that we get paid appropriately for the services we render under the contracts we sign, and doing a better job of pointing technology, people, and process against that have paid dividends. I think there's a lot of opportunity in the future.
Yeah.
I would also say, if you think about the payers, we have an opportunity to work together with payers to make this set of processes more digital, more integrated, simplify the administrative processes, help get them the data they need, and the like. This is not just, you know, kind of us versus them.
This is making sure that we're processing claims as well as we can and make sure we get the output that we think we're owed.
Yeah, maybe both sides don't need to spend as much money as they do doing this at the end of the day.
That's right.
Yes.
There's opportunity here. The other areas that I'm seeing that I think have some real potential here would be the use of ambient AI technologies to help doctors document. I think you're seeing on the outpatient side, I'm talking about physician clinics now.
Yeah.
Think about ambulatory. You're seeing us and others start to pilot and roll out ambient AI technologies. What this does is AI listens into the conversation between a doctor and a patient, and it helps that doctor produce a more timely and more complete and more accurate documentation, which I think is, and based on our audits of our pilots we've done, produce more complete, more timely, more accurate documentation, which we view as being good for patients and good for doctors and good for the system overall. We are starting to pilot that on the inpatient side, but very little. It's pretty nascent.
We have a handful of doctors that are piloting ambient at hospitals, but it's pretty early days on that. I think documentation and helping doctors get more timely and more complete and more accurate is a good thing, and it's an area where I think AI can play a big role in the future.
Okay. No, that's great. It kind of feeds into, you know, maybe negotiating on the commercial payer side. I mean, obviously, you know, your position is you're collecting what you're owed and what's in your contracts, which is good.
Yeah.
They are probably seeing it as, you know, costs that are maybe incremental to what they were initially thinking as part of their planning process, which puts them in a little bit of a more difficult situation. Do you feel like any of that is coming into the rate negotiations you're having? I guess, how would you characterize the rate negotiations now versus where maybe they've been, you know, in a couple of years post-COVID when you were dealing with, you know, getting some of the compensation back for the excess labor that the industry saw?
Yeah, you know, we're still, you know, those are two to three-year contracts.
Yeah.
As you know, there's a bit of renewal cycle that we're going through, and we're contracted for 2025.
Yeah.
We're over 80% contracted for 2026, and we're, you know, call it a third contracted for 2027 on the commercial side. Largely the same rates for Medicare and Medicaid.
Yeah.
I would characterize our renewal cycle as going well. We tend to have long-term relationships with payers. We tend to work through these struggles the best we can, and we try to help them. We try to get through these in good order. I think just the evidence of where we are in our contracting cycle, we feel good about in terms of getting through the negotiations in a reasonable way. We're still kind of largely at our targeted level of reimbursement rate increases.
Yeah.
As we've gone through this, it's always a challenge. It's a challenging piece of work for them and for us.
Yeah.
I'm comfortable with where we are. You know, we try to make sure that in our work with payers that we're finding ways to help each other. Some of that is administrative simplification. Some of that is being cognizant of where they are with Medicare and with Medicaid and the like. Generally speaking, I feel pretty comfortable with where we are. I would also say that if you think about our model, we tend to be contracted. We want to be contracted across as many products as we can, and our access to lives and the percent completion around our contracts in our marketplace is as good as it's ever been. That's a good sign overall of where we are with our payer partners.
On the Medicare side, we've seen the inpatient and outpatient proposed rates. Any areas of concern or appreciation in the rates? Did anything jump out to you that was maybe unexpected about them?
I mean, we were disappointed with the OPPS rule.
Yeah.
I think their proposal on both the 340B recoupment timing and the inpatient-only list elimination is, we don't like, as you can imagine. We're advocating that CMS reconsider those as they go from proposed to final. I hope that they would do that. On the other side, the inpatient IPPS rule has come out a bit favorable for HCA Healthcare. It's actually a bit elevated from our recent trends. Given that 70% of our Medicare revenues are inpatient versus outpatient, I think for 2026, the rate update is in line, if not even a little better than our recent trends in total. Inpatient's a little better than outpatient. In total, I think the update is in line with our recent trends.
Okay, and then, you know, maybe to spend a little bit of time on, you know, capital and capital deployment. I guess, how do you think about, you know, the potential that there, you know, could potentially be more M&A or more hospital assets to look at over the next several years? I know at one point this was, you know, a more important part of the company's strategy. You've always been very selective about it, but the company doesn't, hasn't added a new market, I think, in quite some time now. How do you think about the potential to maybe do more M&A over the next three to five years than you have over the past, you know, maybe three to five?
I think it's interesting when I think about the company and our capital allocation approach broadly over time. Over the last several years, you see us spend about 45% - 55% of our capital investing capital back into our markets to drive organic growth. We really like our 43 markets. We believe that there is still a very robust pipeline of opportunities to invest in our organic markets, our core markets.
That is really the key to our overall growth strategy. There's good demand in our markets, and these investments will really allow us to do two things. Number one is to capture the demand growth that we're seeing, and number two, to take market share over time. That's still the core of how we think about our long-term growth strategy and the like. The second thing is M&A. We've done M&A over the years. We've already bought two acute care hospitals this year. We're pretty active on the outpatient side with M&A. They tend to be lower dollar transactions just because of the size and scale.
We have acquired a number of urgent care systems, a number of freestanding emergency room businesses, imaging centers, and the like. We are active in terms of network development, using M&A, both on inpatient and outpatient. It could increase over time. I mean, we are going to have to see, you know, what the next three to five years looks like, and the overall environment of hospitals.
It may change a bit. I think you're going to see some consistency for HCA Healthcare in how we apply our thought process of capital allocation. I mean, you know, we pay a reasonable dividend. I think that clearly will continue. You know, we're big believers in the share repurchase program as well.
Yeah.
The balance that we have in that approach towards capital allocation, I think, has worked well for the company. I think you'll see some consistency in that.
Makes sense. Yeah, obviously it's gotta be sensible, and the returns have to be there.
You said this. W e try to be very disciplined.
Yeah.
When we do M&A, some of the best deals that we've done are the deals that we haven't done. You know, it's gotta be the right market. It's gotta be the right assets. It's gotta fit our profile. You'll continue to see that disciplined approach towards M&A that I think we've exhibited over the last several years.
Makes sense. You touched on the dividend. If you just think about the push and pull of maybe considering a maybe even more meaningful dividend versus share purchase, what's the company's thought process around that?
We've been pretty consistent in our dividend approach. I mean, outside of just the COVID year, we think that the level of our dividend and kind of our approach to the annual increase has made a lot of sense for us. It's in that balance between capital investments, M&A, dividend, and share repurchase. I think the balance that you've seen over the past would be a pretty good predictor of the future. At this point, there's always flexibility. I'm not changing guidance or anything like that.
Yeah.
At this point, we're not contemplating, at least for now, material change to our approach on dividend.
Okay, that's great. I think that's probably about all the time we have today.
Yeah.
Thank you so much.
Appreciate it.
Thank you.
Good to see you.
Thanks.
Thanks again.