Welcome to the HCA Healthcare Third Quarter twenty twenty Earnings Preview Conference Call. Today is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Mark Kimbrough. Please go ahead.
Okay. Thank you, Michelle, and good morning. I'd like to welcome everyone on today's call. Keeping with the theme that nothing is normal in 2020, we felt it was appropriate to have a call today to discuss yesterday's release, previewing our third quarter and the return or early repayment of CARES Act funds. With me this morning is our CEO, Sam Hazen and our CFO, Bill Rutherford and also our CMO, Doctor.
John Perlin. Sam will provide some prepared remarks and then we'll have an abbreviated Q and A. So the call should be approximately thirty minutes. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward looking statements, they are based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today.
More information on forward looking statements and these factors are listed in yesterday's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling to income before taxes for HCA Healthcare Inc. Is included in yesterday's release. This morning's call is being recorded and a replay will be available later today.
With that, I'll now turn the call over to Sam. Good morning and thank you for joining our call on short notice. Yesterday, the company issued a press release which previewed our preliminary financial results for the third quarter and highlighted our decision to return or repay early approximately $6,000,000,000 of governmental assistance we received from the CARES Act. In short, we had a very strong performance in the quarter. This performance, similar to the last part of the second quarter, was driven by solid revenue growth and disciplined cost management.
In the third quarter, our facilities provided care to almost forty thousand patients who were admitted to our hospitals with COVID-nineteen. That reflected in part surges in two of our markets, Texas and Florida. As we faced these community threats, we maintained our focus on the two primary objectives we established at the beginning of the pandemic, which were to protect our people and protect the company. We did that by adhering to the five guiding principles that I mentioned in a previous earnings call. These principles have provided a framework for decision making and actions throughout this public health crisis, and they will continue to guide us into the future.
I am proud to say that we were able to manage our hospitals and outpatient facilities effectively during this period. Since the beginning of the pandemic, we have now treated over sixty thousand inpatients with COVID-nineteen. We have used learnings from these cases to improve our clinical and operational capabilities, which has allowed us to deliver better care to patients with COVID-nineteen. In many instances, these capabilities are translating to better care for all of our patients. We will continue our efforts to build upon these in the future.
Once again, I want to thank our colleagues and physicians for the incredible work they have demonstrated over these seven months. Over the past one hundred days, I have visited 35 HCA Healthcare hospitals and I'm both humbled by and grateful for the professionalism, the commitment and the compassion our people have shown during this challenging event. During the quarter, revenues grew approximately 5% year over year. This growth was mainly driven by two factors. First, overall acuity associated with our inpatients increased by almost 8%.
And secondly, payer mix improved with commercial admissions accounting for 24% of the total as compared to 23% last year. As a result, inpatient revenue per admission grew by 14%, which drove a 10% growth in inpatient revenue. Outpatient revenue conversely was down five percent. Not surprisingly, same facility volumes were down across most categories. Inpatient admissions were down 4%, but because of the increased acuity, patient days were up 2.5%.
Emergency room visits were down 20%, but our mix of ER patients was oriented to the more acute categories. And lastly, outpatient surgeries were down six percent. For many weeks in the quarter, we voluntarily suspended elective care at numerous hospitals to respond appropriately to the surge in COVID-nineteen. We believe these decisions adversely impacted volumes in many categories of our business, but we are hopeful that we will recover most of these cases in future months. Now let me transition to our decision regarding the CARES Act funding.
The return or early repayment of governmental assistance from the CARES Act represents all of the company's share of provider relief funds and Medicare accelerated payments that we received. We greatly appreciate the CARES Act funding and the policymakers who fought hard to ensure hospitals would have the necessary resources during the pandemic. During the early days of the pandemic, we took a conservative approach to managing the company. Our management teams and all our colleagues took important and swift actions to address the clinical, operational and financial challenges this global health crisis has presented. Our people have once again demonstrated an impressive ability to leverage the unique scale that we have and effectively execute a plan.
As a result and because of better than expected financial results, more information and more experience in managing our operations during this pandemic, HCA Healthcare will return these funds. The guidance from HHS continues to evolve around these two programs. And based upon our current understanding, we could retain all of the funds into mid-twenty twenty one and possibly some permanently for the Provider Relief Program and up to twenty nine months for the Accelerated Payments Program. But we believe returning these taxpayer dollars early is appropriate and a socially responsible thing to do. Additionally, this quarter, we reversed the $822,000,000 of government stimulus income recognized in the 2020.
The impact of this reversal is included in both adjusted EBITDA and income before income taxes. While there are still many uncertainties that exist, we believe the company is well positioned to drive long term growth. We have proven that we can meet the challenge of this pandemic and we believe that we will be able to navigate successfully through future challenges as well. As we honor our mission, we will remain focused on high quality care for our patients, the well-being of our colleagues, the well-being of our physicians and the vital role we play in the communities we serve. That concludes my prepared remarks.
And now I'll turn the call over to Mark for questions. Thank you. All right, Michelle. We're ready for questions. If you'll just give instructions on how to queue in again and remind everyone to limit their questions to one so that we can get as many on as available this morning.
Thank you.
Okay. So at this time, if anybody would like to ask a question, please press star one on your telephone keypad. Again, that would be star one on your telephone keypad. Your first question comes from Matthew Gillmor from Baird. Your line is open.
Hey, thanks for the question. I guess I wanted to ask about Acuity and how COVID is impacting that. Is the COVID mix something that's contributing to Acuity or is the deferral with some of the elective surgery sort of more than offsetting whatever impact there is from COVID on acuity? Hey Matt. Hey Matt, this
is Bill. Let me start with that. As we've said before, the COVID patients do bring a higher acuity. These patients consume a lot of resources, a lot of supplies, pharmaceuticals and critical care capacity. So they do bring a higher acuity.
And as a result, they bring a higher revenue mix with it. So they are definitely a factor, but I think there are other factors in line with our overall acuity. As Sam mentioned, the payer mix is a factor in that. Some of the lower ER volume is that lower acuity business that's not returning as quickly. So I think there are multiple factors in the acuity profile for HCA in the quarter.
COVID was one, the payer mix was another and then some of the lower acuity business declines that we're seeing. Bill, I want
you to think also that some of this is just the first people that are coming back just tend to
be sicker. Absolutely. Yes, we've talked about that before. We do believe as the cases do return, the first ones that will return will be the higher acuity or more medically necessary cases.
And your next question comes from Pito Chickering from Deutsche Bank. Your line is open.
Hey, morning guys. Thanks for taking my questions. I know that you normally don't do this, but this is definitely quite a year. In fact, you're hosting this call points how unusual it is. But can you walk us through the progression of revenues and margins that you saw during the third quarter?
Specifically, how did July look in terms of deferred surgeries and COVID patients? It split into August as the deferred surgeries went away and COVID waned? And then finally, so where September was in terms of acuity, payer mix and margins? And finally, any color you can provide us about how OR scheduling looks for October?
Yes, Pete, let me try. Typically give that. I would tell you throughout the quarter, most of the major trends were very consistent. July, we talked about we did see the COVID surge and we did see our voluntary suspension of elective procedures. That tended to kind of equalize themselves.
And as we went through the quarter, most of the volume statistics as well as the intensity remained relatively consistent. Our cost efforts continued. And so that was a key factor for our results for the quarter. But I don't think there's anything unique one month versus the other as we went through the third quarter.
Pete, this is Sam. Let me add to Bill's comment. When we look at the cases in March and April that were on our schedule and ultimately deferred as a result of governmental orders, roughly two thirds of those cases have either been completed or rescheduled. When we look at the elective deferrals that we implemented in the third quarter, roughly onethree of those have been recovered, which is again defined as conducted or scheduled. So we still have, we believe, a lot of cases that were deferred that will ultimately show themselves down the road.
And that's why we said we're hopeful in my prepared comments that we will recover these cases in due time. Thank you, Pito. Next question, Cheryl?
And your next question will come from Justin Lake, Wolfe Research. Your line is open.
Thanks. Good morning. Wanted to try to understand a couple of things. One, cost cutting, right? You came into the third quarter not knowing what the world was going to look like.
Obviously, things were a lot better than most of us would have expected. Can you talk about the cost you took out of the business and how sustained it in the third quarter? And how we should think about that going into 2021? And then just quickly on your comments around volumes, you did say that July volumes were actually positive and yet they're down 9% for the quarter. So it doesn't sound like it was ratable for the quarter.
Can you give us any color on that? Thanks. I think what we said in the second quarter, Justin, was that our average daily census at the time of our earnings call was actually trending above June. So that, just to clarify, I think we said that and June was actually up year over year. But to your point, July volumes at the time of the call, which was the twenty second, we did say our average daily census was trending higher than June.
And it was. Justin, let me try just on some of the cost efforts. We've kind of put that under context of our resiliency plans. And as we talked about in last quarter, continues we really had our Phase one efforts, which were our immediate responses that we executed in the second quarter. Really those were adjustments around a lot
of our
discretionary expenses, marketing, travel, some repairs and maintenance, made some adjustments around contract services. We ensured that our variable cost adjusted as we saw volume declines. And as you recall, our commitment that no ACA employee would lose their job or be furloughed. Most of our labor actions were around premium labor where we tried to eliminate as much contract labor and overtime as we could during those Phase one efforts. And I think those were really part of the success that we've seen.
We've moved into kind of our Phase two resiliency efforts. These are more longer term actions where we've got multiple efforts throughout the organization, including looking at our corporate support functions, looking at field based support about how we can streamline some field based support structures. As we've seen the reboot and the volume come back online, we focused on how can we bring more consistent operating practices and reducing some redundancies or variation. So those continue to be executed. Some have been implemented.
Some will continue as we go through the balance of this year into 2021. And so I think all of those efforts combined have resulted, I think, in us being able to manage the expense structure of the company appropriately as we've seen the volume return, during the past couple of months.
All right. Thank you, Justin. Appreciate the question.
Your next question will come from A. J. Rice from Credit Suisse. Your line is open.
Hi, everybody. Thanks. Maybe just obviously, you had two good quarters. I understand the concept of giving the money back to the government on the CARES Act and the relief funds. What does that do in your thinking about capital deployment?
Obviously, over the years, deployment around share repurchase and dividends has been a huge part of the HCA story. I know early in the year, was prudent to step back from that. How quick do you think you'll revisit that? And then also on capital deployment, any discussions arising in the aftermath of this crisis or as we go through this crisis with other hospital systems that might be of interest to you? Are you seeing any pickup in that activity?
Yes. A. J, this is Phil. Let me start with the capital and Sam can talk about the other. As you might expect, we haven't made any decisions around our capital allocation process at this point in time.
We're entering our as you know, our twenty twenty one planning process and we'll complete this year and go through the evaluation of the most appropriate capital allocation for the company as we go in the year and communicate those in our year end call. As you mentioned, we've historically had a very balanced allocation of capital between our internal capital spending, acquisition capital, dividends and share repurchase. Obviously, with the pandemic, we suspended those that I think were prudent under the circumstances. You are right with the return of our CARES Act. We do see some flexibility to evaluate when is the right time to return to some of those historical allocation policies, but we haven't made any firm decisions on those.
And that will be part of our capital planning as we go into 2021. On the other same No, the acquisition. Yes, around just hospital discussion.
Yes. I don't know that anything's really changed materially from the previous discussion, that we had in the last call about health systems going through their own strategic process and determining that possibly divestiture was the best course for them. We obviously continue to have discussions. We are evaluating those discussions appropriately. HCA Healthcare is built to be bigger, we believe.
But obviously, they have to fit our model. They have to fit our financial objectives and be an appropriate use of capital. And so there's a lot that goes into that instinctively or intuitively rather. I think you would assume or one would assume that there would be some pressures for some systems and the possibility of opportunities coming from that. But again, they have to meet those measures that are important to us.
A. Thank you for the question. Michelle?
Yes. And your next question will come from Whit Mayo from UBS Investment Bank. Your line is open.
Hey, thanks. I just wanted to follow-up a little bit on AJ's last question, but more focused on the internal capital spending. I know you guys pulled back your plan this year. You've talked a little bit, I think, in recent months about evaluating some pop up growth opportunities. Just I just want to take your temperature and take see if there's any change in your posture around the internal capital spending.
Well, this is Sam. Thank you. We did dial back our capital expenditures at the beginning of the pandemic. As a cautionary measure and conservative approach. We have, subsequent to that decision, released some of those decisions that we made and started to repopulate some of our internal capital pipeline.
I will tell you that on our ambulatory platform, we continue to invest in that at the same pace, maybe even an accelerated pace. I think our de novo ambulatory surgery center development pipeline is probably more robust than it has been in many years, and we've approved capital to support that. We continue to invest in freestanding emergency rooms in certain markets where we believe there are community needs. And so there's a reasonable pipeline on that front. Then as it relates to physician clinic expansions and such, those are small dollar items, but fairly high volume items with respect to capital spending.
We continue to run the company at reasonable levels of occupancy. Again, our patient days were actually up, so there's pressure inside of our facilities with respect to inpatient beds in some instances. We are in the process, as Bill alluded to, of evaluating exactly what opportunities do we need to push forward on in 2021 and how much capital will that require. With respect to pop up growth opportunities, we're executing on those across our portfolio very aggressively. When we find opportunities to do acquisitions of physician clinics, outpatient facilities and such, we are moving on those and taking advantage of dislocation that occurs in some markets as a result of maybe pressure from a competitor that we don't have or we're able to use the ability of our portfolio to support other aspects of market movement.
So from that standpoint, the accelerator is down in our company on taking advantage of those end market opportunities where appropriate. And that may require some capital, but as they surface, we will address those at the time. Thank you, Wirad. Michelle?
Your next question comes from Frank Morgan from RBC. Your line is open.
Good morning. My
question, you had mentioned the outpatient, you had shut down some
of your capacity during the surge. I'm just curious, has all your capacity on the outpatient surgery side reopened today? And are you seeing any different attitude today from either physicians or patients as a result of this? And do you think it's less likely that you'll see sort of these opening and closes in the future? Are we getting to a point where we think we can just run and adapt and operate through short term surges?
Thanks. Thanks, Frank. Frank, this is Sam. We have, for the most part, opened all of our outpatient capacity surgery, urgent care, diagnostic clinics, physician clinics and so forth. Now as we indicated, our outpatient surgery is down about eight percent in the quarter, so we haven't seen a full repatriation of the volume that we had pre COVID.
There are certain categories within our outpatient surgery that have been slower to recover. Some of the endoscopy categories have been slower to recover than previous trends. What we have proven, believe, to ourselves as well as to local leaders in Texas and Florida in particular, that we can manage up during a surge and we can manage down as we need to in order to accommodate what's going on in the community. I think the 60,000 patients plus that ACA has dealt with over the course of this pandemic has given us incredible experiences with respect to managing the clinical aspects of the patient and providing a positive outcome as best we can for them. But at the same time, our operational capabilities, our organizational capabilities have been significantly enhanced.
Our technology capabilities from our IT and clinical teams significantly advanced. So we have positioned ourselves better at this particular juncture than we were going into the pandemic on other measures that I think are going to be positive for us in the future. And that's why we think top up growth opportunities are going to present themselves, better care experiences are going to present themselves, and we're continue to push forward on all of those dimensions as we deliver on our mission in the future. Just as a point of clarification, I think Sam mentioned eight percent surgery, outpatient surgery is down. I think the number actually was six percent, just to kind of clarify for you.
So you said I made a No. No. Not not at all. Thanks, Frank. Thank you.
Michelle?
Your next question comes from Steven Valiquette from Barclays. Your line is open.
Great. Thanks. Good morning, everybody. Thanks, Steve. So you mentioned the forty thousand COVID patients in the quarter, if I heard the number correctly.
And there are some regions in the country where hospitals are now at full capacity because of COVID prevalence. I know it's probably hard to answer this from a system wide perspective for HCA because so much matters regionally. But where is HCA just from a capacity standpoint in terms of ability to treat COVID patients relative to that forty thousand number? I'm guessing you're still really not even close to reaching full capacity, but just want to confirm that. And let's say next quarter, if you're treating eighty thousand to one hundred thousand COVID patients, how does that sort of change your the way you're managing the business from an operational and financial perspective?
Thanks.
Thanks, Steve. Well, the first two months of this quarter were very intense for the company. That's when we saw the surges in both Texas and Florida. Arizona was going through their own surge at the same time. And we don't have any hospitals there, but we saw spillover surges, if you want to call it that, in parts of Georgia, South Carolina and Tennessee at that particular juncture.
So early in the quarter, our census levels for COVID positive patients or persons under investigation were significantly higher than they are today. And we finished the quarter with census levels for COVID patients consistent with where we were in the second quarter, in the middle of the second quarter. We're anticipating that we will run somewhere around that particular level into the foreseeable future with some situations where, again, we have to dial up our capabilities to respond to surges. For example, Florida has recently reopened their economy fully. We're anticipating that we could see some surges in Florida.
And so we have our triggers within our programs to respond to that. But I think these experiences, as I mentioned previously, have proven to ourselves, have proven to state government in many instances that we can in fact manage our community responsibility appropriately and respond to the situation. Again, we had over 100 hospitals in the second quarter where we voluntarily suspended all elective care to ensure we had staff, to ensure we had PPE, and to ensure we had physical capacity to take care of those patients. That was quite significant during that period, given that Texas and Florida represent roughly half of HCA's beds. So I don't know if that fully answers your question, but that's sort of how we think about it and that gives you some context to our abilities.
Steve, that's really helpful. Thanks. Appreciate it. Michelle?
Your next question comes from Joshua Ruskin from Nephron. Your line is open.
James. Good morning. Hi, Mark. Appreciate you taking the question. I'm just curious when you think acuity and mix will stabilize before we have a vaccine and that.
But sort of have you gotten through that backlog of all the higher cost, higher acuity commercial patients? And do you think that that lower acuity activity is just permanently finding other avenues for care?
That's a good question. Well, as I mentioned a second ago, we believe that two thirds of the first category of deferred cases in March and April have been accomplished or scheduled. The second deferral, which happened in this quarter, we think onethree of those have done. How acute those patients are, I don't know. We have seen in some of our more acute surgical categories, as an example, that orthopedic volumes are solid, but they're not back to where they were before with total joints.
We've seen that in certain cardiac cath categories and cardiology categories, where, again, we're not all the way back to where we were. We don't believe that total joint pain has subsided because of COVID. We don't think cardiac conditions have been resolved because of COVID, nor have back problems been resolved because of COVID. So we anticipate that the pain tolerance, if you will, for some of those patients will reach a point where they reenter the system. What we believe has happened is that with less emergency room activity, some of the lower end medicine cases that we were having to manage previously are not showing up and that's influencing the case mix and the overall acuity that Bill alluded to.
I don't know if that will start to show up again or not. We will have to see how that plays out. But the composition of our emergency room business is more acute as a result. And then some of those patients within that are dealing with issues that were maybe a bit prolonged and therefore they've been more pronounced. And when they do get admitted, they're somewhat sicker.
How that stabilizes over time? Again, it's hard to judge because we're anticipating that we're going to experience COVID into 2021 easily. And therefore, we're going to have some of these situations with deferrals with very acute COVID related patients and such. And we'll just have to manage through it and understand it hopefully better sometime next year than we do right now. Thank you, Josh.
Hey, Michelle, we're going to take two more questions.
Okay. So your next question then will come from Ralph Giacob from Citi. Your line is open.
Great, thanks. A quick follow-up I guess to a previous question. Is there any way to estimate or ballpark how much volume was impacted by self imposed closures or cancellations in those hotspot areas? And then just quickly I wanted to go back to sort of payer mix and the 100 basis points better. I mean, do you think explains that?
I mean, you think it is just those deferrals and it just being weighted to commercial? Or how do you explain that given the economic backdrop? Thanks. Okay. Let me take the first one and I'll let Bill answer the second one.
There were no governmental imposed restrictions in the third quarter. We imposed those restrictions upon ourselves as the appropriate thing to do in responding to this situation in the communities we serve. So there no governmental impositions of requirements related to elective care. We had active channel discussions with the Governor's office in Texas, Florida, Tennessee and other states, giving them Colorado, giving them information about what was going on, letting them know where we were with capacity management as were other health systems in those communities. And so the collaboration of the health system in general in these markets was, in my opinion, impressive and responsive to the circumstances.
That's different than the second quarter when we were dealing with the imposition of governmental closure requirements. So that was voluntary on the part of HCA. There'll be a question related to Yes.
On the mix, Ralph, I think there are probably a couple of variables. But I think it's more a factor that the Medicare population is further down than our other payer classes. And as we've talked about in some situations in the past, it seems to make sense. Maybe that population being more vulnerable are the ones that will take a little bit longer to return. So it really tends to be in that lower acuity Medicare volume that is affecting kind of the overall mix that we're seeing.
Okay. Thank you, Ralph. Thanks. You. Michelle, last question please.
Okay. Your final question for today will come from Scott Fidel from Stephens. Your line is open.
Hi, thanks. Good morning and appreciate you fitting me in. Actually just had a follow-up as well to Rob's question on the payer mix. And just interested on the Medicaid side in particular whether what you've seen in terms of volumes just given how much Medicaid enrollments have increased since the beginning of the crisis and then also just on the self pay side as well? Thanks.
Yes. I don't think there's anything remarkable to call out. Our Medicaid volume likely will show a two point decline or so. So it's less than the overall. But it's still I don't think there's any significant Medicaid trends that I would call out on the volume side of that.
The uninsured volume decline is not as much as the overall. We were able and do have some coverage for uninsured COVID patients that is affecting that a little bit. But I would tell you both those classes, if you will, are pretty stable. And I don't think there's anything really noteworthy to call out.
All right, Bill. Thank you. Thank you, Scott, for the question. With that, we're going to bid you goodbye and we will release final results on the twenty sixth. And at that point, I have a lot more detail for you on the quarter.
But thank you so much for the short notice of jumping on the call and hope you have a great day. Thank you so much.
Thank you everyone. This will conclude today's conference call. You may now disconnect.