We base our go forward assumptions on. You get a little forward visibility. You can look in physician clinic office, you can look at surgical schedules. Our real volume kind of assessment comes from just predictive patterns we've seen in our markets. We said, really as we went through 2022, we see a return to normal in historical volume patterns coming off at least a post-COVID surge environment. We started to see building momentum in the marketplace, good volume, good demand last half of 2022. As we turned the calendar into 2023, that momentum continued. We were very pleased with the volume trends we saw in the first quarter. You know, obviously first quarter, we still had a comp from COVID activity in the first quarter of 2022.
As we go through, the balance of 23, we continue to believe this return to normal trends makes sense for us. We're very pleased with the volume patterns and the demand we're seeing in the markets right now.
We usually think about that return to normal trends translating to flattish EBITDA sequentially into the second quarter, a softer three Q, and then four Q being the strongest quarter. Is there anything to call out from the first quarter results that would change your assessment of that seasonal pattern?
No, I wouldn't say. I mean, that's our baseline assumption. There's always things that come period to period that's hard to predict. I think historically, I think that makes sense in terms of the trends. Again, first quarter was a, was a pretty good quarter for us, I believe. You know, we did have some COVID support payments in the first half of 22 that don't continue into 23. Outside of those that we've called out, I think it's fair to assume a normal seasonal trend for us.
Can we dig in a little bit deeper on the underlying demand in your markets? Do you believe people were delaying the lower acuity treatment? Do you believe the 4%-6% surgical volume growth in 1Q reflected some recapture of delayed electives?
There may have been. It's hard for us to dissect, you know, the volume that you're seeing in any one period, how much came from people who maybe deferred care or not. Fundamentally, I do believe people deferred some low acuity care during COVID. I don't know how much of that's still left. You know, we've been probably 14 months since we had a COVID surge, so I would think much of that has returned, but there still may be some residual of that. I think the dynamics we're seeing in our markets, we saw strong population growth during COVID. People moved to Florida and Texas and the like. markets are still wide open. We still believe we see very favorable economic indicators, still low unemployment, which tends to have a strong correlation to demand.
I think there's a lotta factors that go into our volume pattern. We think we're positioned better coming out of COVID than we were going into COVID. Our capital programs continue to be an important part of it. It's hard to dissect exactly how much of that, but I think there were definitely some lower acuity services that were deferred during COVID. I think much of that's returned. Hopefully, there's a little bit more to return in the future.
Just getting to the deferral point, over the last few years, there's been ongoing shift in high acuity procedures out of the inpatient and into outpatient, notably MSK. Has this created a top-line headwind? Could you discuss your ASC footprint, competitive positioning, what other inpatient procedures you expect to migrate?
I mean, no question during COVID, one of the service lines that moved rapidly between inpatient, outpatient was joint replacements.
Mm-hmm.
It was largely, I think, driven by clinical protocols and anesthesia and pain management protocols. I'd say pre-COVID, 75% were done in an inpatient. Post-COVID, 75% are done in an outpatient. Fortunately, much of those outpatients are still done within a hospital campus. There's still some going into ASCs. We've navigated through that. I think that trend is mostly behind us. We don't necessarily see another service line that has those same characteristics to move as quick, but there's always been this migration to outpatient. We have a very large outpatient network. As you know, we have over 2,500 sites of care. We have an ambulatory surgery footprint reaching 150 surgery centers and GI centers, as well as our hospital-based outpatient centers.
We're prepared, I think, very well to capture that migration when it occurs, and indeed we did.
You noted, strong payer mix trends in your markets as people can migrate to Florida and Texas.
Yeah.
One of your peers highlighted headwinds from sequential Medicare Advantage mix. Can you discuss your take on MA mix trends and how HCA is positioned for penetration?
There's no doubt we've seen MA as a percentage of Medicare grow over the years. I mean, it used to be a third of the Medicare business is pushing in some markets over half of the Medicare business, even north of that. I think we're positioned very well with both from a contract standpoint, obviously, as well as a network standpoint. I think our Medicare admissions in the first quarter grew over 5%, I think it's pretty equal between fee for service and MA in that standpoint. Again, I think there's some marginal contribution that comes with that Medicare, we're fortunate we're seeing all categories grow. Medicare is growing, which is not a bad thing, and our commercial activity continues to grow. That's really led by health insurance exchanges.
We saw great enrollment in our markets in health insurance exchanges. I think our HIX admissions were up over 19% or so in the first quarter. We're seeing, I think, good growth in all of our major payer classes.
Okay, just getting back to the HIX point. Of course, some of your larger states, Florida, Texas, Tennessee, have not expanded Medicaid...
Yeah
... leaving a coverage gap in those states. Biden's enhanced ACA subsidies are helping to fill that gap to some extent, though, uninsured remain in those markets. However, with the expanded subsidies and the higher commercial reimbursement, have we reached or are we reaching a point where the economic benefit from the expanded individual coverage is offsetting the coverage hole left by holdout states?
I think it's. I don't know if it's completely offset, to be honest with you. We still have uninsured activity in our markets, but it's been relatively stable. We were very pleased with the enrollment we saw this year. I mean, we were seeing, I think, Texas was up, you know, 30%. Florida and Texas combined were up close to 20% enrollment on there. That's generally correlates pretty well with our volume that we see. We're very pleased with those enhanced subsidies that I think continue into 2025. I think it is providing coverage to a lot of people who otherwise wouldn't gain access to coverage, and hopefully that will continue.
In addition to the embedded demand in your markets, you recently called out opportunities to improve quality, efficiency, and growth by narrowing variation across the platform and key elements of your business. Can you expand on that a bit and give us an idea of the specific actions you can take?
Yeah. Well, let me introduce Mike Marks, who's our Senior Vice President of Financial Operations. You may know we reorganized in the first of this year. We went from two operating groups to three operating groups. I think more importantly, we elevated our most senior operators. Jon Foster is our Chief Operating Officer, partners with Mike, Financial, to be able to drive consistent practices, reduce variation. We've talked about before our resiliency efforts is a really important part of our response to the environment, inflationary environment. Mike leads those efforts. One of these efforts we've had is we call it our benchmarking, but basically, utilizing advanced analytics to look to see where do we have opportunities even inside HCA, and whether to reduce variation of supply utilization and certain operating costs and the like.
Mike, do you wanna mention a couple of the resiliency programs we have in place?
Sure, yeah. The one that you mentioned I think has been really powerful. We've created an internal benchmarking tool that takes 166 measures of cost and operating efficiency. Every hospital will know exactly how they perform against the rest of HCA, and those are tied to external benchmarks as well. It helps our hospitals really find where their variability is. You know, over time, when you can find where you have the most opportunity, it helps our management teams really focus their efforts where their biggest opportunities are instead of chasing every opportunity like they're equal. From a corporate standpoint, it allows us to really find those areas of opportunity and provide corporate support down to the hospitals.
Both internal and external benchmarking is very effective to help us really find the biggest opportunities and take and allocate our resources accordingly. We break out supply utilization by service line and compare across 180 for those variations, or do we have opportunities in some of those areas. Some of our other there'd be some of our energy procurement or even our physician support costs. You can look at anesthesia costs or a surgical case. We can use that. Even though we operate, we believe, best in the industry, there's still opportunity inside the economy of HCA. This benchmarking tool and effort has been a key part of our resiliency program.
Is that something that you can really leverage when you're negotiating with payers, in terms of being able to demonstrate a efficient utilization?
I think so. I mean, obviously, we think we have a lot of value propositions to bring to the payers. Clearly, our network, our clinical outcomes, the ability to provide a full array of service to their members. I'm not so sure they're as interested in some of our efficiency plays, but they're, you know. Our intent is to elevate our discussions with the payers on a much more strategic level versus a transactional level, where we can develop centers of excellence over certain clinical programs. We can provide full access to the cover. There's multiple ways we try to present ourselves to the payers and I think we do a pretty good job at that.
Then you've talked about, I think, over the last year or two, kind of, contract rates with commercial payers kind of in the 6% range. Are we still seeing?
We haven't quoted that number, I don't think. We say mid-single digits. You know, when we started to see inflationary trends in late 2022, we obviously started to introduce those inflationary trends into our rate negotiations. We've been, I think, pleased with the response we've got from the payers. We've been generally successful at being able to close contracts in that range, which is a little above trend, in recognition of the inflationary environment we're in. We've talked about some of our completion rates on the calls, and we'll continue to do that. Hopefully, we'll continue to be able to close those contracts at reasonable rates going forward.
As you've anticipated, I have to do a section on staffing. Increased hiring has certainly helped you reduce contract labor costs. Could you take a moment to discuss your recruiting and retention initiatives with contract labor rates decreasing? Has turnover improved, and is it easier to hire?
It's another area that Mike and John lead for the company. I'll just intro it. Part of our response, obviously, we hit our high-water mark of labor in first quarter of 2022, mainly driven by the COVID surge. As everyone knows, we had to utilize a high level of contract labor just 'cause of the disruption that occurred in the workforce. We've been very pleased with the progress since that time. We've seen sequential improvement in our labor dynamics, but it's through a lot of effort. We have kind of a labor and capacity plan that's led by the operating team. We've invested in recruitment. We've focused on reducing turnover. We've focused on capacity management through length of stay.
You've probably heard us talk a little, where we refer to it, our Care Transformation Initiative, bring new models of care, of diversifying the workforce, whether it be through patient care techs, LPNs. All of that has led us to continue to see sequential improvement in labor. Mike, I don't know if you wanna talk about some specifics underneath those programs.
Sure. The one I would mention is length of stay. You know, really important. If you look at first quarter of last year to first quarter of this year, we're down almost 5.1% on our length of stay. That's really one of the main ways we were able to take on such a significant volume growth that we saw the prior year. It's been really a culmination of the significant effort to drive people, process, and technology improvements through our case management function and our length-of-stay management function. From a technology standpoint, we've rolled out a series of tools that are supported through data science algorithms that really help our teams identify the patients that have the best opportunity for discharge in a real-time environment. We put a lot of investment in our people.
You think about the case managers in the field that are working this every day, we've elevated their leadership, we've invested in their staffing, and I think it's really helping us from a people, process, and technology standpoint, continue to focus on driving length of stay improvements. It'll be a big part of what we do in the future as well.
That's been a key part of us seeing reductions in contract labor. We've also invested significantly in our recruitment organization and resources. I think we've increased our recruitment resources 30% or 40% since kind of the COVID era. We've put in more technology. We've tried to ease the onboarding process, and I think we quoted our recruitment numbers were up almost 19% in the first quarter. We've focused heavily with our operating teams on reducing turnover through employee rounding, employee resolution. Yes, we've had to make some market wage adjustments to respond to the market. It's our sense the labor market is improving and settling, if you will, from the disruption we saw during these COVID surges.
All of that, I think, has helped us reduce the utilization of contract labor, and hopefully those trends will continue as we go through the year.
We certainly saw improvement sequentially, and I think while some of your other peers were seeing a flattish experience, but, can you remind us what's in guidance for contract for the rest of the year?
We haven't given specific guidance on contract labor. We said we believe we can manage overall labor costs as a percentage of revenue in 2023, consistent with 2022.
Mm-hmm.
There's a lot of components that go in there. Contract labor, staffing, employee wage adjustments on there. I think that's our broad guidance. We have said that our contract labor percent of SWB, I think it was just over 7% in the first quarter, about that in the fourth quarter. It was roughly 9.5% in the first quarter. Our goal is to get that under seven. Hopefully operate 6.5-7. We've utilized another number in terms of our hours, of nursing hours in contract labor. We're just above 10. We hope to get that in the high single digits by the time we close out the year.
Mike, I don't know if I cut you off earlier. Did you have something?
I'm good.
Okay. You noted continued progress reducing declination rates in the first quarter, with perhaps another 100 basis points of admissions to recapture before capacity returns to pre-COVID levels. When we think about labor economics, at what point is it better to forgo marginal volume rather than pay for marginal contractor, and how do you gauge that trade-off?
It's a great question and there's a formula there that would make sense that you would bring on some contract labor in order to serve that volume. I think we're getting to a point to be able to do that. It's really nuanced when you think about it shift by shift, facility by facility. Oftentimes, you have to purchase that contract labor in advance of knowing the volume. Our teams have been really focused over the past year of just reducing the utilization. There is a formula there that would make sense, and I think some of our facilities do that better than others, and I think that's part of our operational learnings that we're gonna continue to harness and push through the balance of the year.
Let's shift to staying on labor, but from a different angle. Maybe talk about the Galen School of Nursing, how that's progressing, what the long-term opportunity is and how recruiting's going there?
Galen College of Nursing has been a great strategic integration for HCA. I think we're up to 14 campuses right now. We have about 12,000 students enrolled in Galen. It's our goal to have a Galen College of Nursing in every major HCA market. We're on our way. I think we just approved another eight campuses. We'll have well over 20 campuses over the next 2 to 3 years. It will be one important feature of sourcing and supplying nurses for us. They do the clinical rotations at the end of their education in an HCA hospital. It's been an important area. If you think about it, if we are one of, if not the largest employer of nurses, they're quickly becoming the largest educator of nurses. I think it's just a strategic integration makes sense for.
We're very pleased with that, and we continue to ramp up our expansion plans.
I read the other day that nursing schools have said that they could actually increase their admissions by 50% if they could get teachers. Are you guys having a hard time finding people to teach at Galen Schools?
Far, no. I have heard a similar stat, that there are nurse candidates there who are wanting to go to nursing school, but there's not enough nursing capacity on there. I'm not so sure if it's a faculty or a physical capacity, we have heard, you know, there's a demand for people to move into nursing careers, which I think is a good thing. I have not heard that we've had trouble with faculty. We've had very successful campus openings. We had great opening in Austin, Texas. We had one in Myrtle Beach. Our Nashville campus opened. I haven't heard it's necessarily a faculty issue. It's actually one more strategic alignment for us.
We can have our experienced clinicians and nurses actually serve as faculty in the Galen College of Nursing, if they're looking for advancements in or changes in their career. Hopefully, that won't be a barrier going forward.
You know, we work closely with the other nursing schools in our market. You know, we're not gonna be hiring a hundred percent of our nurses from Galen. We have a lot of academic partnerships. We do hear that from the nursing schools and marketplaces. We, we try to supplement that the best we can with scholarships and funding requirements as possible. You know, we're now really America's largest hirer of new grad nurses, and it's a huge source of our recruiting of nurses across all of our markets. Galen's a piece of that puzzle, but it's not the whole puzzle.
We've heard broadly that, you know, economic difficulties brings nurses, you know, back into the hospitals. Have you seen that at all in Galen in the faculty or in your facility?
No, because I don't think we've seen, in at least in our markets, the economic difficulties yet. I think in past times, I think that's true, as you may get a downturn in economy, then it brings people back into the workforce. I don't think that's been a dynamic yet. I think we're really in this post-COVID environment where the labor market was disrupted during COVID, is also returning to normal trends. I don't think that dynamic has been a factor yet. As I said before, what I'm hearing from our leaders at Galen is there are a lot of people who are wanting to go into nursing school going forward, and I think that portends good things.
I mean, we have seen nurses that took traveler assignments during COVID for really inflated rates when it was at its surge, that they've decided now that with the traveler rates coming down, that a lot of them are coming back to full-time employment in individual hospitals. That's the one comeback that we've seen.
Shifting gears just a little bit, with Envision having recently filed Chapter Eleven. Early thoughts you can offer given the consolidation of your JV recently, with Envision or any other Envision contracts in place.
We've had a strategic partnership and relationship with Envision for over a decade now. As you can think about their provision and our need for hospital-based physicians, emergency room doctors and anesthesiologists, hospitals and the like. We had a 50/50 joint venture for years that was win-win for both organizations. As we mentioned in our first quarter call, we had the opportunity to increase our equity position in that joint venture and raise our ownership to 90%. On that, I think it was important for us to have, get a little bit more governance and oversight of those programs. As a result, we're gonna have to consolidate that from an accounting perspective. It's an important kind of relationship for us. Yes, we know they have filed further restructuring. I think all of our programs have stabilized it.
I think our joint venture efforts was a key step in stabilizing those programs. We're not anticipating any material disruption right there.
I guess we'll close with kind of the requisite capital allocation strategy question.
I love talking about capital.
Yeah. What kind of investments are you pursuing to strengthen the core markets, and how is that contributing to your long-term margin outlook?
Well, as you know, in the first quarter, we raised our capital expectations for our internal capital spending. You know, we have an overall balanced approach to capital between CapEx or maintaining the balance sheet at the low end of our leverage to be execute on strategic acquisitions as they materialize, returning value to shareholders through a dividend and share repurchase program. We upped our capital guidance based on growth opportunities we're seeing in the market. It comes, you know, those growth opportunities come in probably three channels. Opportunities to expand our inpatient footprint. We're running high occupancy levels, almost 74%. I think we've announced over eight new hospitals under construction. In addition, we're adding inpatient towers and wings to meet what we think is the continued growing demand for healthcare.
That's a big piece of our capital. We also mentioned on the call we're actually buying some land for future hospital development. We think those are long-term plays for us. We're also deploying capital to our outpatient network development. There's a lot of projects in there. It doesn't consume that much dollars relatively to the inpatient, but I think we have over 60 freestanding EDs in our pipeline. We continue to expand our urgent care footprint, our diagnostic capabilities and the like. The third category is really in support of our service line and clinical initiatives. It may be expanding surgical suites, cath labs, emergency rooms, neonatal intensive care. We've done some robotic program expansions. All of those, I say or signal as the opportunities we see to deploy capital to continue the growth profile of HCA.
We're continuing to be pleased with, I think, you know, good returns on invested capital from those decisions.
It seems like as we've seen this migration to outpatient, a lot of higher acuity services, it seems, you know, the inpatient, of course, is becoming more acute, but that demand seems to still be there, fairly strong.
There's no question there's demand. Historically, we'd see 1.5% 2% demand for inpatient capacity. We continue to see the HCA networks gaining share. I think we gained over 60 points of share pre-COVID coming out of COVID. That has delivered this 2%- 3% kinda profile for us that we think is a good guide for us in the future.
Well, great. I think that brings us right to time. Thank you so much, gentlemen.
Thanks, Ben.
for joining us.
Appreciate it. Thank you.