Welcome, everyone to our session with HCA Healthcare. We're very happy to have them participating in our conference again this year. Michael Marks, Executive Vice President and Chief Financial Officer of the company, is with us. Thanks for doing this, Mike.
Great to be here.
Maybe just to start off, a high-level question. We're 10 months into the year. What have been some of the surprises for you? What have been some of the challenges, to the extent there's been some?
I think broadly, through the first 10 months of the year, there's a lot going well. I mean, the work of the company and our quality and patient safety initiatives continue to perform really well. Our growth initiatives, if you think about the work we're doing to build out our networks, optimize our network. T he allocation of our capital investments into the field continue to produce momentum in our markets. We're pleased generally, with the demand in our markets for healthcare services and frankly with our network development, and capital investment programs with our competitive positioning. We're seeing that in market share improvement. Broadly, the work of the company to drive growth continues to perform well in our view. Operationally, if you look at our operating leverage and our ability to manage cost and drive efficiencies as a company, I'm pleased.
I mean, I'll use length of stay as an example, but we're seeing really good improvement this year in the management of length of stay and our overall margin performance has been quite good as we've gone through the first 10 months. In terms of our people, and that's a really important piece, I mean, we're 315,000 colleagues that took care of 44 million patients last year. We are fundamentally in the people business. When I look at things like our engagement with patients, with our employees, with our physicians, our engagement work continues to perform well and we're seeing improvements really across all three of those categories. We're also seeing the results of our workforce development efforts. We see things like retention and the production of our education capabilities, like Galen and our physician residency programs continue to gain steam.
Overall, I think we're broadly pleased. In terms of surprises, and I don't know if I'd call them a surprise, I would say that as we came into the year, we thought that our volume would be closer to 3%-4%. I mean, 2024 was a really robust year in volume growth. We're a little short of that. We're back in this 2%-3% range, and caught in the midpoint of that. Interestingly, I would say that where we're a little short of our original expectations are things like Medicaid and self-pay. That payer mix rotation has produced a good net revenue growth and a good economic performance. I'll end there. I think financially, we've had a good year through the first three quarters. We're pleased as we sit here today, and are looking to prepare for 2026 and beyond.
Yeah. No, that's great. O n the third quarter call, you guys gave some high-level puts and takes for next year. One of your comments you made is you thought that volumes would continue to be in sort of that 2%-3% range next year. Can you give us a little bit of flavor for what gives you some confidence on that?
Yeah. Saying this on the call, but I'll reiterate, part of this is what we're seeing in our markets. We have 43 markets. Our markets tend to have population growth that's above the U.S. average. They tend to have strong economies, which drive things like employee-sponsored insurance coverage. If you think about the work of the company to expand our networks, and we've had a string of years now where we've had heavy capital investment years, including this year, where we'll spend $5 billion in capital. That work to build more resilient and expansive networks is allowing us to increase our competitive position. We're on almost 19 quarters of year-over-year growth. I think the fundamentals of what we're seeing from the bottoms up from our markets is part of what gives us confidence.
At the macro level, when I think about the big mover in that, will be ePTCs, right? If ePTCs get extended here at the last minute, I think you could see us being maybe at the upper end of that 2%-3% range. If they expire, I think you would see us on the lower end of that range. That' s how I think about the 2%-3%. The confidence still comes back to the fundamentals. Fundamentally, we take care of patients, and we're a hospital-centric health system. It comes down to the strength of our markets, they give us the most confidence.
Okay. A couple of things maybe on just that comment. There had been this chatter that if we're going to have people drop off, they don't think they've got the benefits next year or the coverage next year, that perhaps we'd see this pickup in a rush to get last-minute surgeries, etc., etc. I don't know how your scheduling looks for November, December, because I would assume it wouldn't have started until we get an open enrollment. Are you seeing anything? I know you don't like to comment that much on interquarter, but have you seen any activity that suggests we've got a rush to get care done here at the end of the year?
Let me not comment on fourth quarter. I need to be consistent with that approach. I will say, when we look deeply at third quarter and our results for third quarter on volume and demand, we did n't really see indications that there was a pull forward of demand in third quarter. I think it' s a legitimate question, right? In past recessions, for example, you could see a little pull forward of demand as people were thinking about the coming year. I do not know how closely connected the general citizen is to this debate around ePTCs yet. At this point, at least through third quarter, we have not seen enough evidence that would suggest that third quarter was impacted by a pull forward of demand.
I don't know how much, maybe you have a window on this. When people are going to sign up and they're seeing these change in benefits, do you have educational programs in the local communities that you give or is that mainly up to the insurers and the brokers to do that?
We do. We' ve worked over the last really a year preparing for this really hard with Caroline, our revenue cycle operation, to have pretty expansive output through mailers, through phone calls, and through on-site financial counselors over the last several months, that have helped people who are coming in with exchange coverage understand their options and understand their enrollment process for the coming year. We are not brokers, so we cannot sign people up personally on the exchanges, but we have put forward a pretty significant effort to try to help educate and connect the exchange population with their options and with what to look for 2026.
Okay. You talked about the 2%-3% range. I think the investment community has sort of thought the range would be a little wider than the 2%-3%, just 1%, mainly based on the growth you've seen. You've seen really good growth in the exchange volume in the last few years. I t's hard for you to comment on the disconnect of maybe investors and analysts thinking it would be a wider range than that, but is there anything you can add to why your confidence is only about a 1% swing factor no matter what?
I've already mentioned the fundamentals on the market.
Right, s o you think it's more of the [fundamentals]?
I think that's a piece of the story. The other thing I would say is, if you look at it by payer, which is I think really what you're speaking to, we continue to see the baby boomers age into the Medicare program. I think the movement into Medicare will continue to be at a bit of an elevated level here in 2026, and really into 2027 and 2028. Broadly, we're comfortable. The employee-sponsored insurance seems pretty steady. Frankly, if ePTCs do expire, there will be a component of people who are on the exchanges now that we think go back to employee-sponsored insurance. You could see even some lift in employee-sponsored insurance as part of that rotation on payer mix. Exchanges are the big wild card, right? They're 8% of our volume.
I think what some people are thinking though, is that there's a cliff. In other words, if ePTCs expire, there will be this one-year movement to the new run rate. We actually think that it may take two or three years for that to fully settle out. I think that people who are on the exchanges that have chronic diseases and the like, I think they're going to try to stay on the exchanges and they may drop a medal tier. They'll stay. I think again, there will be some folks that go back to employee-sponsored insurance. T here will be some folks that become uninsured. The other thing I would say of that though, is not like people who go from having healthcare insurance on the exchanges to being uninsured. They do not stop using healthcare services entirely.
I think they utilize it at a lower rate than when they had coverage, but it doesn't go to zero. What changes is they pretty much just come to the emergency rooms. There's a little different rotation there, AJ, but if you just think about all the factors that make up volume growth on demand, ePTCs and the exchanges are one of those factors. We believe that the outcomes, coupled with all these other items that I've mentioned, still largely bring us into this 2%-3% range, is our best thinking at this point.
When you comment on the payer mix shifts, so do you have any estimates to share about how many would end up uninsured, how many would end up going back to employer-sponsored coverage, how many would stay on the exchanges but trade down a medal tier? Any thoughts on that? I know you haven't given formal guidance, but I'll ask around those.
I would be disappointed if you didn' t ask, AJ. We are not going to size it yet. We will g ive as much information as we can on the fourth quarter call about what we think the impact is going to be. Also, I think, and you know a lot about this, so I think this will resonate. These are estimates. This is a pretty unique event. Trying to figure out exactly how 24 million people will act and what choices they will make, there is a bit of a range here, including, I think a two- to three-year process for that all to settle out. We are not going to size it at this point, but we will give you more information and the best information we can when we give you o ur 2026 f ull-year guidance.
Okay. No, that's great. I mean, another big mover this year and the last few years has been these supplemental payments. Y ou've got a couple that are pending, I think that could be fairly meaningful for you, Florida, Georgia. There may be others that you're tracking that are important, an y update on those? Any thoughts on where those go?
For context, the grandfathered application opportunity really came out of the One Big Beautiful Bill. I mean, there are positives and negatives in everything, right? The One Big Beautiful Bill reforms over the next decade, really the payment amounts and the tax rates related to SDPs. It also ga ve us this opportunity for states that filed pursuant to the grandfathered provisions, to enhance their programs in the meantime. It has the opportunity to help us in 2025 through 2028 navigate these reforms in not only the One Big Beautiful Bill, bu t what happens with ePTC. These are helpful. These are a good thing. It wa s part of what I think of as the bargain of the One Big Beautiful Bill. There are five states whose applications I would call material to HCA, meaningful to HCA.
Two of the five have already been approved, and t hat's Kansas and Texas. There are three that are still in review by CMS, and that's Florida, Georgia, and Virginia. There are a couple of other states that have filed, but they're not nearly as meaningful as those five. We are waiting to see now that it looks like the government's going to reopen, assuming that the House passes it and the president signs it. We're hopeful. We're encouraged based on what we saw from the CMS review and approval process before the shutdown.
They're not approved yet, right? They're at CMS, and we're waiting to see what happens here once the government reopens. Those three applications would be helpful for sure. They would help us kind of navigate the rest of this year and then really through 2028. If you think about even starting in 2028, it gives you a bigger base to start with as you go through the reform cycle through that next seven or eight years.
Right, a nd either with the known ones or all of them that are on the table, have you been able to size how much they might be worth?
We haven't sized them yet. We will give more information in aggregate on our fourth quarter call. I mean, as you know from our past, we don't tend to size individual programs because they move around so much. We will give you our best thinking about the aggregate net impact of all of our programs, including what happens with these remaining three applications on our fourth quarter call when we give 2026 guidance. Suffice it to say, these are good things. These are helpful things that I think will, if we can get them approved by CMS, help us navigate both the ePTC environment should those expire, and then over the longer-term view, help us navigate the reform to Medicaid. We're hopeful that they get reviewed, and we view them as a positive potential for the company.
I think we've estimated, going through the state filings, etc., that it's potentially in aggregate about $700 million of potential EBITDA tailwind to you. The ones that have been approved and the ones pending. I'm not going to get a reaction from any of that. What about just the politics? I know you guys are intimately involved in making the case for the industry and for HCA in Washington. I think a l ot of people have jumped to the conclusion that these enhanced subsidies are not going to get extended at this point, given how things played out over the weekend. What are you hearing? Do you have any additional insight you provide on that? More broadly, around anything else that's a healthcare initiative that's important to you that's in the works?
I mean, I think you guys get a sense of what's going on, right? The company, if you go back even a year ago, we've put forward a lot of effort to first raise awareness of the importance of ePTCs, and not just to healthcare providers, but to people. There are 24 million people now, almost 25 million people, who get their coverage on exchanges. We spent a lot of time and effort as a company working with a broad coalition of other insurance companies and providers, and patient advocacy groups, trying to raise awareness of the potential impact on affordability and on coverage of a lot of folks. It was clear through those efforts that there was an increased level of concern and f rankly, on both parties.
I mean, I think the fact that the government shut down, at least largely on this issue, is recognition that this is a matter of concern. Now what we're looking for is what happens with action, right? I do think here over the next four to six weeks, there is still an opportunity here for a resolution of this and potentially a deal that could either extend the enhanced program, the tax credits in either their current form or some modified form. We're on the clock. I mean, as you know, I mean, we're down here now to the last bit of time here. We're watching it carefully and advocating carefully. We'll know soon.
As we have talked about before, while the company continues to be heavily active in trying to advocate for this, and frankly for our communities that we serve and for these people who get their coverage in this way, we are also preparing. We have spent a lot of time as a company over the last 12- 18 months working on our resiliency plans, working on our digital transformation agenda to really prepare the company for the future, whichever course, frankly the exchanges go.
Right, o kay.
Let me say this too. I mean, this package does include some good things. PAYGO, for example, gets waived, which is a great thing for the industry. They dealt partially with the extenders, which is a good thing. There were some good components of the package.
Okay. I mean, one of the things that was in the One Big Beautiful Bill was this rural hospital fund. I mean, you're predominantly urban-suburban, but even in HCA's portfolio, there was some thought that there might be something. Have you heard anything more from the states or probably not as much from the feds, about how that money might be allocated? Is there an opportunity for you guys there?
Yeah. We think about 15% of our hospitals are in a rural classification, that are adjacent to our urban and suburban markets, but still have rural characteristics that we think largely could apply. We are watching the state's applications very carefully. They're largely kind of coming into Washington now. We do not have a sizing yet of what it could mean. I think there is some potential upside there.
W e will know more here over the next few weeks as CMS processes all 50 states' applications, and w e get a better sense. I mean, half of the money kind of goes to the states on an equal basis, right? H alf the money is an application that each state files and competes for money. We have still got to learn about how all that fleshes out. I think it could be a moderate type of benefit for us, but we're still watching it.
Okay. Maybe just to ask about a couple of fundamental areas. On the expense side, labor, it seems like you're at a pretty stable point there. Certainly, all the post-pandemic pressures have eased at this point. You're down to a pretty modest level on contract labor. Is it steady from here? Do you think there's opportunities on the labor front? I know professional fees have been a pressure point. What's the latest thinking there as well?
Let's start with clinical labor first, and then we'll get to pro fees. On clinical labor, I do think we're operating in a bit of a stable operating environment right now. All of the work of the company over the last few years is paying dividends. In addition to just the macro environment stabilizing, HCA has been hard at work on our workforce development plan. You think about the expansion of our Galen College of Nursing, our expansion of our physician residency programs, t he work that we've done with our management teams to adopt best practices on retention have paid dividends. We have seen the workforce stabilize and improve in addition to the macro environment stabilizing. Yes, I do think on clinical labor, we're in a pretty good spot coming into 2026, a spot of a bit of stability, so I echo that.
Professional fees are continuing to be a bit of a moving target for us. I mean, we've spent the last two to three years working really hard in the emergency room, in the hospital side, hospital medicine side, with our acquisition of Valesco. We had to do that. That was a partnership that was managed by Envision as they were going through their bankruptcy process. We pulled that in and have spent a significant amount of time and energy, and resources stabilizing that workforce and integrating that capability into the company. I think our management teams, and frankly the physicians and staff of that entity have done a wonderful job. We're feeling better about our emergency room and hospital medicine side. The remaining challenge, in our view, on that component of hospital-based physicians is really the reimbursement challenges from payers.
We're continuing to work with our payer partners to try to get fair reimbursement for those professional services. As we're sitting here today in 2025, the bigger challenges are anesthesia and radiology today. There are pretty significant supply and demand imbalances with anesthesiologists, mid-levels, radiologists that we're still working through. We are working through a series of action plans, including building some internal capabilities when we need to employ anesthesiologists. We're working hard on the allocation of what this is as a very scarce resource. We're working on things like our scheduling routines, our site of service management routines, very operationally driven to try to better manage the resources we have, working with our vendor partners and our anesthesiologist teams. Radiology has that same dynamic. I mean, it's being affected a little bit by supply and demand.
We're working with our radiology groups to try to be as productive as we can. I do think over the next five years, AI will be helpful in radiology as well. Those two areas of professional fees continue to be a bit of a challenge. We're up about 11% this year, same facility on pro fees, largely driven by those two categories. I don't think that we're ready to say that 2026 will be back to just normal inflationary levels. I think it's still going to be a bit elevated next year.
Just remind us, what percent of revenues or however you want to size it roughly is professional fees?
It's about 24% of our other operating expenses.
Okay.
If you just go to the income statement, look at other operating expenses, it's about a quarter.
Okay. I know from time to time, there's a particular area of emphasis or focus on the supply expense area. As you move into 2026, are there particular opportunities? How would you characterize that? Is that relatively stable?
It's stable. I mean, there's two kind of moving parts , that we're all watching very carefully. The first one's tariffs. I think HealthTrust and our supply chain teams, and frankly our hospital management teams, have done a wonderful job navigating the challenge environment around tariffs. We have not seen a super material impact into 2025. There's a lot of work there, right? There's a lot of work in terms of our sourcing, our contracting, our strategies around vendor selection and the like, to really help navigate and manage the fluid environment that is tariffs. That work will continue into 2026 and beyond for sure. That's one area of work that HealthTrust has and continues to stay focused on. The second area would be our resiliency plans and supplies, so t hings like adoption of new technology.
We have a series of initiatives in both pharmaceuticals and medical devices that we work with our management teams on, that help manage the mix of our supplies. All of that work combined has produced a good result for us in 2025. We got a robust action plan in 2026, so I'm hopeful. The only other thing I would say about HealthTrust and our supply chain team, which we think of as an at-scale shared service for supply chain, right? I mean, we centrally manage it. We have pretty robust and sophisticated warehouses and logistics management teams. Our big agenda for 2026 and beyond is digital. The opportunities that we're seeing through things like AI, machine learning, even the basics on robotic process automation throughout HealthTrust and our supply chain continue to be very encouraging. HealthTrust is hard at work. It's a great organization. We're super proud of those teams.
Yeah. You mentioned AI a couple of times, and we've had some panels on that at the conference here. I know you guys have made some significant investments there. Where are the biggest opportunities in AI for the company?
We're trying to take a balanced approach here. We organize our AI work into three domains, clinical, operational, and administrative. It's really important on the clinical side, which is frankly much harder and is going to take longer because of the inherent risks. On the clinical side, this is our opportunity to engage our physicians and our nurses and our clinical teams on AI, so i t's important. It's important to make sure that a chunk of our investments are pointed at the mission of the company, which is taking care of patients. We have a number of work streams in AI that are pointed at patient safety, and quality outcomes and making those better. I'll give you a couple of examples, and then we'll move to the other domains. We are hard at work at this nurse handoff tool.
We do about 400,000 shift changes a week in this company. Think about this as when a nurse is leaving shift and a nurse is coming on shift. The amount of time that they're in overlap, because they're doing this patient handoff is longer than you think it is. We're working with Google on this. We're finding an opportunity to use AI to really synthesize the medical record and the operational records, and give our nursing teams a much more synthesized and effective way to do shift handoff as they hand off their patients. Given the amount of times we do this in the company, that has a real opportunity clinically to help our nurses through what is one of the riskier areas of work, which is handing off patients between shifts. We are excited about that.
We're live in eight hospitals now, and we look to roll that out in 2026 broadly across the company. We're also working, and this is with a partner, on using AI to read fetal heart monitoring strips in our labor and delivery service line. That work is really fascinating, using AI to really support our nurses and obstetricians in how they monitor patients, moms and babies as they go through the delivery process. That work continues. Actually, that algorithm is at FDA for review and approval, so w e're excited about that. Several others in that category. Let me speak to operations quickly. In the operational domain, we're rolling out an AI-driven scheduling and staffing tool that I think we're just short of 100 hospitals now. They're live on the nursing side of that. That work continues, and I think has a lot of potential in the future.
I will say what we've learned through that rollout though, is how hard it is to roll out AI tools and change behavior on the ground. W e're learning that we have to be just as good at implementation and change management as we do about building AI tools. T hat investment continues in the company as we continue to learn and iterate. R eally, the domain that I think has the shortest pathway to value is administrative, s o think about Parallon and supply chain, and IT and human resources and even our physician practice management platform. Millions of transactions, more centralized operations, more standardized data. W e're finding a long list of use cases to get organized around, to digitize our workflow and bring artificial intelligence into efficiencies and effectiveness in the administrative work. I mean, broadly, I'm pleased with where we are.
We're in early innings with this effort. We're trying to be judicious in our allocation of resources, and making sure that we're getting either a clinical or a financial return on these investments as we scale them. Overall, I'm really encouraged. I think digital transformation will be one of the key strategic initiatives of the company for the foreseeable future.
Yeah, i nteresting. Some of those use cases are pretty interesting. What about capital? We had dinner last night. People were talking about different capital questions. You guys, like you said, $5 billion. Has the priority on where that spending's going changed over the last few years? Maybe some of the buckets, w hat are some of the priorities there?
We start always with the basics, right? Maybe 40% of the spend is infrastructure. It' s making sure that our facilities have the right medical equipment, that the roofs and the boilers and the chillers and the air handlers, and all the kind of heavy infrastructure that we have to have, including things like curb appeal and renovation, is solid. I mean, we have to have really good facilities for doctors and patients and nurses to want to practice. That is a chunk of the work. Our growth capital continues to be a balance between inpatient and outpatient. On the inpatient side, we' ve been adding about 600 beds a year to our inpatient footprint to deal with demand growth. I will say that our work to improve our length of stay has helped us as well deal with demand growth, in addition to adding bed capacity.
We still find markets where occupancy levels tell us that we need to add beds, and so w e are doing that. On the acute care frame, we're also continuing to invest on things like emergency room expansions, operating room expansions, cath lab expansions, and the like to fund our service lines. That work continues. We have a balance, that's pointed outpatient. As we sit here today, we average about 14 outpatient sites for every acute care hospital. That's up pretty materially over the last 5 to 10 years. Over the next decade, we think we're going to need something like 20 outpatient sites of care for every hospital, as we continue to develop and expand our networks, get further into the suburbs, meet patients where they live and provide access for patients.
Things like urgent care facilities, freestanding emergency rooms, surgery centers, physician clinics, and the like will continue to be a big component of our capital spend and also of mergers and acquisitions. I mean, we've been active on the outpatient side with acquisitions as well. I think that idea of network development is still the fundamental for us, both to be able to service demand growth, but also to take market share. We believe our competitive positions in our key markets are key. This capital investment program is pointed to help us ensure that we continue to grow and maintain competitive strength.
One of the debates over dinner last night with a group of investors was around surgical robotics, and how prevalent that will ultimately be. I know you guys have that in virtually all your facilities at this point. The question was, will every operating room have to have one eventually? I wondered if you had any thoughts on that, where you guys are at on that and what you think about that.
I don't know that I'm ready to say that every operating company is going to have a robot. I would say that at HCA, we're believers in robotic technology. W e've been good adopters not only on just Intuitive Surgical, but also in spine and orthopedics and other pulmonary. There's been a pretty widespread technology introduction around robotic surgery across a lot of service lines. W e have found generally our physicians adopting these. I think the results for patients and doctors are such that there has been increased utilization of robotics. Do I think that continues in the future? I do. I don't know that I'm ready to say that every OR in the country will have a robot. I do think that robotics has produced a good benefit for physicians and patients, a nd we will continue to support our patients and physicians accordingly.
Yeah. No, I had the same answer you did. It's hard for me to imagine that everyone would have it. I was just curious on your reaction. Obviously, a big part of the story has been how much on charity purchases. I think this year you'll do $10 billion. Let's just make sure we're on the same page about how the company's thinking about that going forward. Your cash flow continues to grow dramatically. Will we see just charity purchases keep pace? Sometimes I'm asking about dividends. Your view on dividends, is that changing? What's your thoughts about capital a llocation?
I think you can see some consistency in our framework over the last five years for sure. In addition to growing cash flow and using our capital the way we have, we've also had some good delivery on our balance sheet. Our leverage position is in a really good spot. Our balance sheet is in a really good spot as we head into 2026 and beyond. I think you can take some consistency as being the direction right now. We're not ready to size the dollars yet for 2026. I do think the framework that we think about and starts, and we mentioned this in Investor Day, but I think 45%-55% of our capital allocation will continue to be capital investments back into our facilities. We continue to see significant opportunities to invest in our markets.
Our pipeline today sits at about $6.7 billion in flight funded. Every day when we meet with our operating teams, what comes to us continues to be very attractive. I think you can expect to see that being a priority. For what's left, we do mergers and acquisitions every year. I think you've seen some consistency in our approach around dividends. I think you would see that in the future. I don't expect you're going to see material change to our dividend approach. We've been doing share repurchase. I think broadly, without getting dollars yet, I think broadly that formula, first, our views has worked well for funding the mission of the company and taking care of patients, but also creating shareholder value over time.
I think from a framework perspective, we would expect to be consistent largely with that approach. It is also flexible. If opportunities present themselves, I think if inorganic opportunities present themselves or what have you, even though we will always be disciplined, we have that flexibility in our capital allocation program to also be flexible.
All right, g reat. I think with that, we'll wrap it up. I really appreciate Mike representing HCA today and the story. Thanks, everyone for participating. Have a good rest of the day.
Thank you, AJ.
All right, t hank you.