It's my pleasure to be introducing HCA Healthcare. HCA is the largest hospital company in the country. Presenting today we have Sam Hazen, who's the CEO, as well as Bill Rutherford, the CFO. Frank Morgan from Investor Relations is in the room as well. I guess, I know, Sam, is there anything you wanna start off with?
Yeah. Let me just put a little context into the company at this particular point in time. I told a group earlier this morning, you know, we came out of 2019 with an enormous amount of momentum as an organization. Obviously, pandemic hits. We just had a CEO conference in Miami, and in our CEO conference, we were talking about the successes that we had.
Actually, we think we have more momentum coming out of the pandemic than we had going into the pandemic. A lot of that momentum is centered on the culture of the company and where the company sits, you know, reputationally within the communities that we serve. We think our competitive position has actually improved as a result of what we were able to do inside of those three years.
It's evidenced by the fact that our market share is actually up over where it was in 2019 by 60 or 70 basis points, with fairly broad-based success across our portfolio of markets. Competitively, we think we've actually improved our systems capability, as evidenced by market share, as well as some other factors that we think are important to our long-term success. Financially, we have improved our balance sheet, quite significantly, during this time period and put the company in a really good position to invest or have optionality around whatever we wanna do with our capital allocation.
On three major dimensions, the company has actually come out of the pandemic with strength and moved from strength to strength, I think, as an organization. As we go forward, you know, we have an agenda within our company to really reposition us over the next cycle, let's just say the five to seven years, how do we put the company on the same kind of success that we had in the previous period, where we took our market share literally from 23% in 2011 to 28% today as a company. How do we do that? We believe we have opportunities on two fronts.
The one front is the markets that we operate in have this embedded demand growth. They're incredible markets with respect to population growth and other factors that we think are going to naturally lift demand for healthcare services. You said we're a hospital company, Kevin. We're way beyond that. We have about 2,500 outpatient facilities that are part of a system approach to hospitals, and we think that's a unique model that is durable and can go the distance as it's done in the past. We have a lot of growth inside of our markets.
I mean, Florida is growing, Nevada is growing, Texas is growing, Tennessee is growing, Utah is growing. South Carolina is growing, really important markets to our long-term success, and there's this natural lift that's occurring. The second opportunity that we think is really to get better at what we do. We're pretty good right now, but we see across our portfolio of facilities, opportunities to narrow the variation that exists on some key elements of our business and actually improve the quality, improve the efficiency, and really even improve the growth in some cases because of some of the variation that exists.
We're focused with our technology agenda, we're focused with something we're calling our Care Transformation agenda and Workforce Development and then the ongoing Financial Resiliency agenda. Those four elements we think are gonna help us on the other opportunity that we have as an organization. We're pretty excited about where our company is with respect to overall positioning on, you know, sort of the organic growth prospects as well as the improvement in the organizational outcomes.
That's great. That touched on a number of things. Just to kinda dig into that, you know, the market share number that you talked about, like how do you take it from 28 to the next step? Like what's the biggest opportunity? What hasn't been invested in yet? Where are the opportunities?
That's the question I'm asking as the CEO of HCA, Kevin. Yeah, we're asking ourselves the question. We grew 500 basis points in the last decade. You know, what does it take to grow 500 basis points in the next decade? Clearly, it's gonna be capital. We're gonna have to invest capital to expand the capacity of our network, expand the reach of our networks deeper into the markets, and we're prepared to do that. As we just mentioned, we have the flexibility to do that. The second thing for us is continuing to advance our services. We've been very aggressive over the past 7-10 years in adding service line capability, both horizontally and sort of vertically within a particular service line. We still see opportunities there.
I think our outpatient footprint will grow even more, so we'll have more channels, if you will, into our hospitals. Those are the areas that will help us hopefully achieve market share. I mean, we're an execution-oriented company. That's what HCA is all about. It's in our culture. Details matter, relationships matter, and we'll continue to leverage those attributes to help us, you know, push forward on, you know, market share gains and hopefully, achieve what we achieved in the past with our future efforts.
Okay. I guess one of the things I'm trying to get an answer to this week is the volume growth that, you know, hospital companies seem to show in Q1. MedTech companies, Managed Care says it's not a problem, but you guys show really strong growth across the board, and it kinda felt like it came together in Q1. Is there a reason why? Is it easy comps, or is there something that flipped recently to kind of drive that?
I don't know if it flipped. I think we saw building momentum of volume throughout the last half of 2022.
I mean, you know, COVID's in the rear-view mirror, hopefully, in terms of surges. We just saw building momentum in late 2022. I mean, you look at fourth quarter 2022, I think our emergency room visits were up 11%. That carried through in the first quarter, where we were up 10% in the first quarter. I'm not so sure there was a flip. I think it's just building momentum. We see the markets are wide open, good population growth, still strong economic indicators, good enrollment in the health insurance exchanges, you know. I think all of those factors are playing into, I think to positive volume that we're seeing right now.
We always are trying to figure out volume versus where it was pre-COVID.
Yeah.
and kind of like, where do you think we are in that? Are we back at baseline? Is there still an opportunity? How do you think about volume?
Well, it depends on how you look at it. We've said really throughout 2022, we see a return to historical volume patterns and cycles. I think that's what we saw and even in excess of that. For HCA, that's historically we've grown pre-COVID 2%-3% a year in volume. Some years it was above that, some years on the low end of that, we think that's a good planning horizon.
Fortunately, we've exceeded that over the past couple of quarters, we'll see where that goes as we go through the balance of the year. You know, when we look at where we are today, baselining to even 2019, I think we're very pleased where the company is. Revenue growth, if you look at that, it's almost 25%-28% from that period of time. Volume's up.
You know, our outpatient surgical volumes are trending. Again, I think we've weathered through that pandemic disruption, and as Sam mentioned, we see a lot of momentum, and I think probably even in a stronger position in many cases.
Yeah, 'cause I guess, like to your point, your volumes are above 2019. You've been above 2019.
Yeah
A little while longer than your peers have had. If you take that two to three and kinda say like, "Well, actually, you should be 8%-12% above.
Yeah.
You're actually right there.
I'm not so sure I'd buy that just because there was such disruption early 2020. I mean, especially that early period when you look at March and April, I mean, volume really fell. I don't know if necessarily we think you can just CAGR that out and say that's where you should be. I think if you accept for the volume in 2020, you look at 2021, good volume growth, 2022, good volume growth, you know, I think we're on a good trend for 2023. There were some unique things in 2020 it would be hard to recover entirely from that.
Okay. So as far as 2023 goes, it doesn't sound like you're seeing anything unusual in the boldness of utilization or anything that normalizes. This is. You kinda think this is a decent way to think about 2023?
I think so. I mean, that's what our guidance suggests. I mean, obviously we'll need time as it goes through, but we're pleased with the momentum that we're seeing. Hopefully that will continue, and we're prepared to, I think, continue to manage through that and execute on it.
I'm not looking back to 2019.
Yeah.
I mean, just for the record, we're going forward. That's in the rear view mirror. We're gonna look through the front windshield. We think there's sufficient demand in the market and growing demand in the market to accomplish what we need to accomplish.
Then, you know, your commentary about doing things better and more efficiently. Like, A lot of that was around volumes and things like that. We think about the margin side of the equation. You guys have been remarkably consistent between 19%-20% margins for like 20 years. It's kinda crazy. Like, is that just the way to think about it, like, going forward, or is there opportunity on that side of?
We're always looking to drive appropriately margins up, there's a lot of variables that go into margins or volume because we get incremental margin, pricing, acuity. Clearly managing our cost structure, Sam alluded to. We've got efforts to continue to drive efficiencies throughout HCA on multiple resiliency programs, whether it be through benchmarking ourselves, next generation of shared services, some of our capacity management.
You know, we're constantly looking for where is the next opportunity of efficiency. Again, we're doing that in a backdrop of a higher inflationary environment than we've seen in 20 years. We're very pleased where the margin profile of HCA is. If you look at our guidance, it would suggest that we can continue to operate in that level, and we'll continue to do everything to do that.
Yeah. I guess in particular, more recently, the cost spike that everyone's feeling is labor. How are you managing that? What should we be expecting as far as temp labor, where is that going? Wage growth, where is that going?
You know, we hit the high-water mark in first quarter of 2022 because of just the labor disruption that COVID caused, and we've been really pleased with the progress in the labor since that first quarter of 2022, and I think that shows out in the data. If you look at first quarter, about 9.5% of our SWB was dedicated to contract labor.
This most recent quarter was just over 7%. We think there's continued opportunity to improve utilization. Our teams have been focused on increasing recruitment, reducing turnover. We mentioned some of those statistics on our call. We continue to see opportunities. We're taking some of the benefit of the reduction of contract labor, and we're reinvesting back into our employed workforce, and that's showing, you know, I think, some positive developments.
We'll continue, I think, to manage that appropriately. If you go back to our year-end call, our guidance suggests that we can maintain our labor cost as a % of revenue, very consistent with where we ended 2022.
Let me go back to the efficiency thing, and the margins. We believe that if we can fully digitize HCA in, sort of an industry-leading way, mirror what's accomplished, been accomplished in other companies, that we have opportunities to get.
Significantly more efficient than we are today, Kevin. That assumes all things being equal. The other thing I will tell you that our care transformation and innovation agenda, which is connected to our digital agenda, is also an opportunity for us to get a little bit more consistent in the care models that we have, in the processes underneath those models, and again, deliver a more efficient and a better outcome for the patient as well. Those two things have a lot of upside for us, we believe. We've got to get through the journey of getting those things installed and ultimately implemented. We think it really opens up the opportunities for the company on that particular dimension.
Where do you see that most? Is that savings on labor? Is it savings on supplies? Is it savings on overhead?
I think it's across the board.
I mean, I think it allows us to utilize our people more effectively and more efficiently. I think it allows us to gain better consistency in our utilization of supplies and what have you. Our case management agenda and the throughput within capacity management, we think can be enhanced by this. There's a lot of dimensions, if you will, to it that will help us deliver efficiency, we believe.
When you think about the labor market broadly, I guess one of the things that when we look at it, clearly there's been improvement. Like, everyone's kind of saying Q1 peaked, and it's gotten better.
Yeah.
When we try to step back and put it into context, we're still at numbers that, like, companies haven't seen in a number of years, like, as far as labor shortages and vacancies and temp staffing. Like, is there a thought process on how we should be thinking about it over the next two or three years? Is there slow improvement? Is it tough to improve from here? Is there dramatic improvement still to come? How do you think about it?
I think there's continued improvement, and we continue to see the labor market settling on there. I think, again, we're very proud with the effort the teams have made in HCA. We're, you know, our recruiting's up, our turnover is down. Contract labor is not quite to pre-COVID levels, but it's on a pathway to get there. You know, I think we're pleased with the progress we're making, and we'll continue those efforts as we go through the year.
I guess at the beginning, Sam, you mentioned one of the things that you felt like from a momentum perspective was the balance sheet was in a better spot. I never really think of HCA having a difficult balance sheet to deal with, but, like, when you think about flexibility you think you have now, where does that capital go? What's the most interesting thing to be investing that capital on?
Well, just for reference, you know, our reference on that is our leverage ratio. We've said, you know, our stated range to operate the company is between 3 and 4 times leverage, we've consistently been on the low end of that. You know, a really key strength of HCA, in my opinion, is kind of our balanced approach to capital deployment. Our first priority is invest in our existing markets.
You saw after our first quarter call, we raised our capital expectations for 2023, that's a signal, a sign of the opportunities we see for continued growth in the marketplace, whether it be through campus expansion, outpatient network development, service line deepening. You know, we've got ample capacity through our cash flow from operations. You know, we'll hold between $8.5 billion-$9 billion.
First priority is investing capital. Second priority, I would say is, you know, as to the extent there are opportunistic acquisitions present themselves, we have the ability to execute on that, and we do. Mostly that's around network expansion and network development. Lastly, we look at, you know, what's the appropriate return to shareholders?
Whether it be through our dividend program, we've been a very active purchaser of our own stock over the past couple of years. I think that balanced allocation of capital will continue. You'll hear us talk about as we look forward, where are there further investment opportunities with our resources to continue the growth agenda? That's what we're gonna continue to go through in 2023, and we continue to see great returns on those, on those projects.
We'll continue to do that.
Let me just add a couple of points there. I mean, obviously, our technology agenda, we're gonna need to invest in that, Kevin, and we're prepared to do that, and we're doing that as we speak. That will, you know, be an area that gets a little bit more attention than maybe it did in the past.
I think it's important to understand the company actually ran 74% occupancy in the first quarter, which was above, I don't look, 2019. I think, you know, from that standpoint, there's this belief that inpatient demand is going away. It's actually growing. The type of demand that we're seeing, more acute patients, is actually a great thing for us because we have the same fixed costs, regardless of the patient in the bed. If it happens to be a patient that's got more acute needs, that generally generates more revenue for us.
The contribution margin downstream is quite productive. When we invest back in our existing facilities, again, we're investing on top of a fixed cost platform that allows us to create greater returns on investing in those facilities, especially ones that are constrained. That's got a bit of a conservative capital allocation, but it's part of the formula for success on how we deliver what we believe to be really good returns on invested capital. That model will continue. Outpatient investment's easy. It's not that expensive. We have a robust investment pipeline of new projects and acquisitions where we can. That's low dollars. When we put the big dollars on top of the hospital platform and then leverage that fixed cost, it's really a nice return opportunity for us.
Okay. you mentioned deals, What does the deal environment look like right now? Are there more things available because people are disrupted, or are people not looking to make changes right now?
Well, outpatient opportunities are more significant than hospital systems. We compete in a bit of a different industry than most of maybe the companies who are here, where we have a large, tax-exempt, nonprofit component that doesn't have the same mindset that maybe we do. That limits our ability to do a lot of hospital acquisitions. We have a difficult regulatory environment also at this particular juncture.
We're poised to do new market acquisitions if they do present themselves. They're just not really at this particular juncture presenting themselves. We don't need acquisitions to be successful. That's the beauty of the portfolio that we have. I mean, literally, Dallas-Fort Worth will add a Nashville over the next two decades. That's how many people will be in DFW.
I mean, Austin, Texas, is gonna grow by 50% over the next decade. That's another million people. I mean, Vegas will add a ton of people. Why not invest in that with systems, with capabilities, with synergy, and really utilize our balance sheet to take advantage of those inherent growth prospects and position the company through this. We can do both, but one of them is not presenting themselves.
Yeah. One of the things that we've noticed is that you guys have also been pruning assets. I kinda think that, like, a hospital company is a little bit like the investors here, that if you only buy stocks and never sell them, you're not gonna have a good portfolio after a while.
I think pruning the portfolio makes sense, but where are you on that?
That's on the margins. For us, we've sold a few hospitals that we really couldn't because a certificate of need in Georgia, as an example, we couldn't create a system. Having a system solution, which is who we are, is critical to our success. We have some hospitals that can't accomplish a system for a variety of reasons. We were able to get a really good transaction done, redeploy those resources back into our capital allocation program in a very efficient way, we believe. We're in the later stages of pruning right now. We have, you know, a modest number of assets that we're considering whether or not we should think what their long-term future should be.
Okay. Can you tell us a little bit about redeterminations? Because...
Yeah.
It seems like from the outside that it should only be a positive and potentially a meaningful positive. How are you guys thinking about it?
Well, it can be. I mean, we're in early innings of that process, and every state's taking a little different approach. We've got a fairly well-organized approach in Medicaid redetermination. Very similar to our approach in the early days of health insurance exchanges, making outreach to individuals who may find themselves disenrolled.
I think the key to that metric is gonna be, where do those people who may get disenrolled from Medicaid, how do they find subsequent coverage? We're really encouraged with some of those studies. It suggests a high percentage of those individuals qualify for employer-sponsored insurance or qualify for enhanced subsidies in the health insurance exchanges. Our effort, and I think others' efforts, should be on assisting them finding coverage.
If we can do that and do that appropriately, then, you know, there is a scenario there where there could be some positive trends. It will take a lot of effort, and I think that will unfold over the summer, maybe into the fall, as states start to send those letters, people receive them. Then, really the key is, you know, assistance in getting them covered with other options that they have. To your point, if a high percentage of those individuals can subsequently get coverage, either on the exchanges or through employer-sponsored coverage, there could be some positive developments there. It's too early to call that yet till we see how that unfolds.
Yeah. When I think about the loss of Medicaid enrollment, it feels like from a hospital perspective, it should be less for you relatively because you have the ability to sign people up on the spot when they come in.
We do.
The people who fall off because they didn't fill out the form or whatever, like, you can help stop that dynamic. People who need healthcare are probably likely to stay on Medicaid. People who get kicked off and need healthcare are more likely to search out exchange coverage and employer coverage.
That's what we believe.
It kinda feels.
Yeah.
like it's all heading in the right direction.
It should be. Like you said, we have a host of effort with individuals and technology. If you show up in one of our facilities, we have for years, you know, helped to identify, do you have coverage eligibility, either through Medicaid or in through sponsorship. There is a 90-day Special Enrollment Period post being disenrolled, so we gotta take advantage of those window periods of time. We think we're well prepared to do that, we'll see how that unfolds over the course of the year.
I guess if you think about the economics of it, like, you'd say the commercial rate is 3 times the Medicaid rate, so if you just get 1 commercial person...
Yep. Yeah, if you get two, it's positive.
You get 2, it's positive. If you have 1 commercial patient, you lose three Medicaid patients, your cost just went down, right? Like, it.
Depends where those patients... If they were Medicaid or uninsured, we still have cost of providing care.
How many are insured is the other-
Yeah. It really depends on where do those individuals who don't get coverage, where do they migrate to?
Okay. Can you talk a little bit about a recession? It seems like everyone's expecting a recession, you know, at some point over the next year. How do you think you guys are positioned to grow during a recession?
Well, I think this, if we do have a recession, we have a dynamic in this recessionary cycle that we've never had before, and that is a safety net with the exchanges and with, you know, Medicaid in some cases. In the past, whenever there was a recession, a lot of people lost their employer coverage and went to uninsured ranks.
Well, now there's a safety net on that front, as Bill just spoke to. That's a huge dynamic that we think provides a little bit of support in a recessionary cycle against one of the negative factors that typically occur. Obviously, it should affect the labor market favorably, which would help us. Volume tends to lag a little bit. That's been our experience in recessionary cycles, where the first part of a recessionary cycle, we actually see lift.
In the latter part of the re-recessionary cycle or moving into an expansionary cycle, we see a little bit of a, you know, a change in that trend. This one would be different though because of the effects of the Affordable Care Act on potential.
Yeah.
employees who lose coverage.
Late last year, we undertook an engagement to really do some scenario planning, the what-ifs, as this topic was really front and center late 2022. You know, we went through projections. We looked at past recessionary cycles. You know, how do you respond? Really, a hallmark of HCA is how do we plan for those and prepare for those ahead of time? We've modeled that out. Fortunately, you know, as we look at the indicators, you know, they haven't materialized what some of those projections were last year. We're still in a low unemployment, strong economic indicator. We haven't seen some of the themes that maybe were predicted mid of 2022 show up yet. We're encouraged by those trends.
You know, my worst worry as a healthcare executive has always been a pandemic. Fortunately or unfortunately, I guess, we had to deal with it at our company, and we've learned from that. I think HCA Healthcare differentiated itself significantly in how it worked its way through. We took a very conservative philosophy on the front end with our people, with our balance sheet, and so forth, and then we came out of it stronger. There's a lot of lessons in what we just experienced, and our focus as a management team, Kevin, is not to lose those learnings. I mean, speed matters. It matters in a recession also. You know, leveraging, you know, technology in the pandemic mattered. We've gotta make sure we continue on that front.
you know, making a big company small so we can speed up decision-making, processes helped us during the pandemic. We think that will be a lesson that we can carry into a recessionary cycle as a team. There's a lot of similarities to how we manage the company that would help us, I believe, in a recessionary cycle, irrespective of these other, you know, macro factors with the Affordable Care Act. I think if, you know, of our competitive dynamics, we're better poised than most of our competitors to push through it, local competitors I'm talking about, which is who we sort of battle with.
You know, what's interesting is you talk about going back to the last recession. You went back to the last recession. HCA grew EBITDA, like, double digits between 2007 and 2010 per year, EBITDA. To your point, like, yeah, there's a little bit of pressure on volumes, a little bit of pressure on mix, but it seems like the labor dynamic is usually a more powerful lever than people realize. I mean, like, right now, we have such a tight labor market, it feels like that.
Yeah.
Why wouldn't that play out again? Why won't you grow 4%-6% EBITDA even during a recession?
Well, that's what our planning exercise went through. you know, as I was saying, Mitch, we have a lot of confidence. and kind of the team at HCA, we'll respond to the environment that's presented. We've proven that time and time again. if some of those dynamics do show up, we have confidence we'll respond to that.
I guess the other side of the inflationary environment, you have the cost side, then you got your pricing side. How are you guys doing on the commercial pricing? Do you feel like you're getting the pricing you need to?
I mean, as we've talked about on the call, as we, you know, saw the inflationary environment entering into discussions with the payers, we're kind of pleased with where that's fallen out, mid-single digit ranges. I think there's a recognition by the payers we're in a different inflationary environment than we were. As we've gone through renegotiated contracts, we've been able to mostly achieve that.
Again, we're focused on really strategic relationships with our major payers, and we're pleased with how that's progressing. We talked about we're almost two-thirds contracted for next year, at reasonable rates. So as that continues to occur, the blended book, if you will continue, I think, to show some recognition in the environment we're in.
Okay. Is there anything that is stopping it from happening, from being even bigger? It feels to me like 2022 was a year of disruption, where public companies also on margin compression, but a lot of the nonprofits were losing money. I would think that the nonprofits must be out there being like, "We need six, seven, eight.
Yeah.
Like, Shouldn't you just be drafting off of that?
You sound like him. Yeah, there's a different dynamic there. We'll... You know, our teams do a really nice job of really understanding the marketplace, where are the trends going, and trying to make sure we're positioned well. You know, also recognize the position we do have in that community to provide care to a lot of people.
All right. I think that's all we have time for. Appreciate you taking the time.
Yeah. Thank you, Kevin.
Thank you, everyone.