All right. Good afternoon. I know we're running a little late here. Our next presenter is HCA. With us today is the company CFO, Mike Marks. Mike, thank you for doing this. Well, let's see. Since we're in Nashville,—
Yep.
—healthcare services capital, maybe let's start with how you view the state of the hospital industry, especially as we consider things like the expiration of HIX, One Big Beautiful Bill, macro, demographic trends. People are always asking, what does the hospital industry look like today?
Yeah, it's a dynamic environment for the industry on the hospital side for sure, and you've noted some of the biggest moving parts. On the headwind side, we're kind of halfway through the end of second quarter, the first year of the reform to the exchanges with the expiration of the Enhanced Tax Credits. So that's the biggest moving part for not just for HCA, but really for the industry as we sit here halfway through 2026. There's some positive aspects, too. I think for the industry, certainly for HCA, the demand environment continues to be good. We are seeing overall strong demand, at least in our markets, for healthcare services.
While the exchanges have had a payer mix dynamic under that where people are losing coverage on the exchanges and becoming uninsured, so we're dealing with that pressure, the fundamentals of demand are still strong. Second quarter, and again, I'll use HCA as a proxy, but for second quarter, our insured business, excluding the exchanges, were up 3.2% over prior year. That is a good number when I think about our commercial business, our Medicare and Medicaid business. So demand's good. The policy framework is always such that there's some negative aspects and some positive aspects. In the One Big Beautiful Bill, I think the headlines are the SDP reform and work requirements. But part of this was grandfathering, and HCA was fortunate. We had five states, including one of our largest states, that had this opportunity under the One Big Beautiful Bill to enhance our programs.
Our states, those five states were able to execute on that. Over the last six months here, we've seen all five states now move through to approval. The policy gods taketh away, and the policy gods giveth. In this one, it's a real benefit, and it's helping us navigate some of the negative headwind challenges. There are other aspects, I think, longer term, the industry, we're starting to look at the reform of Medicaid under the One Big Beautiful Bill and how to navigate that. Then I think the whole industry is working through resiliency. We certainly are, and we'll talk about that as we go through today. That's the pace of play. It's a reform environment. It's a dynamic environment. I think the stronger players are navigating through these challenges. Then you got to get to specifics.
Let's get to specifics then.
Let's do it.
No, more HCA specifics. When we think about the second quarter, a lot of moving pieces to unpack. A guidance change, softer surgical volumes, but on the flip side, you bought back a lot of stock. When we think of the guidance for the back half of the year that you've laid out, how do we put the pieces together to bridge us from what was first half into the back half of the year?
Yeah, if you think about the moving parts in our second half guidance that was implied, there are really three or four key moving parts. You have noted one, which is the update to our exchange impact. Based on what we have learned here through the first six months, we did update the negative impact to $1 billion-$1.2 billion, based on what we have learned through the first half. That is a big moving part. The second piece here would be the state supplemental payments. With all the grandfathering applications that are now approved and with the pickup that we were able to record in second quarter related to Florida, we now believe that that is a $300 million-$500 million net benefit for the year, which is a positive thing. I think second quarter also highlighted the improvement in the volume story.
In the first quarter, our volumes were disrupted a little bit with the winter storm and with the kind of sudden stop to the respiratory season. Second quarter pulled right back. We saw 2.5% admission growth, 2.7% on AA growth and, as I have already noted, good results on our insured book, excluding exchanges. We were pleased in our overall guidance, and that includes our belief that that volume growth will continue here through the back half of the year, and that is important. The other component really that is embedded in our guidance update is cost. For second quarter, our resiliency plan produced a good output on our cost management efforts. We believe, given the line of sight we have with resiliency and the actions that we are taking, that it will even be a bit stronger here in the back half of the year.
As I think about the rest of the year, I am really pleased with where we are and where we are going. We also took the time to just realize where we were and adjust the guidance accordingly with those factors. We will update you when third quarter comes.
So maybe if I may double-click on that, one of the questions we are getting asked a lot is the visibility into HIX, right? You adjusted your guidance. A lot of investors are asking, how comfortable or confident are you in that revised guidance range, and what gives you the visibility to say it is going to be $1.2 billion or $1.1 billion midpoint?
Well, what we did is what we always do. Given the dynamic nature of the exchanges, it is the biggest moving part that we have this year, as I have noted. We took what we have learned through the first six months, we made our best estimates for the back half of the year, and then we set a range. We have this range of $1 billion - $1.2 billion. The only other thing I would note here is that there is a bit of a fourth quarter comparison factor here. In hindsight, when you look back at fourth quarter of 2025, we were already starting to see some of the effects of reform. One example of that would be the suspension of the special enrollment period for low-income people. Fourth quarter of 2025 was up only about 2.5% over prior year.
The full-year was over 10% growth in 2025 versus 2024. Even sequentially, typically, fourth quarter would be the peak of our exchange volumes out of the four quarters of the year. In fourth quarter of 2025, we actually saw a 5,000 decline from third quarter to fourth quarter on equivalent admissions. The slowdown started in fourth quarter of last year, and so that is a piece of the story in terms of our second half of 2026 versus second half of 2025. It is one of the reasons why we highlighted that we thought fourth quarter's growth rate would be a little better than third quarter's, is this dynamic on year-over-year comparison on exchanges. It is a dynamic moving part for us.
What we always try to do is give our best judgments and estimate based on what we have seen, and that is what we did at second quarter.
No, that makes sense. Mike, as we think about the payer mix, just excluding the HIX impact, what does that look like for you guys in terms of the durability of the growth rate in your Medicare book or your Medicaid to some extent, and then commercial?
Well, the payer mix dynamics through the first half of the year, when you get through the first component, which is almost this one-for-one migration out of the exchanges to uninsured. Then we saw a little even more uninsured growth related to Medicaid conversion slows down. But that has been well documented. The rest of our paying book, if you think about Medicare, Medicaid, and commercial, it performed really well in the second quarter. It is consistent with our overall thought pattern here around the macro of 2%-3%. But we are pleased with what we are seeing out of demand in our markets at the halfway point in the year. It was encouraging. Coming after first quarter, the signal was a little diluted because of the respiratory season and winter storm.
I know there was a lot of concerns from the investor community about, is demand really durable, especially commercial, excluding HIX. I think second quarter answered that question well for us. Our expectations is that that will continue. That is in our guidance update for the balance of the year.
Mike, so maybe just to clarify that, so you feel good about the sustainability and durability of volumes outside of the payer mix challenges. That is the right way of thinking about that?
It is. If you go back to even our Investor Day in 2023, our long-term plan, which was based on a long run of compound annual growth rate analysis on admissions and adjusted admissions, we set that at 2%-3% growth. We have always said, in any one year, it can be below that or above that, and 2024 and 2025 were above that, right? But as we sit here through 2026, I still think that that 2%-3% growth in equivalent admissions is a proven output from our work. Our work to invest in our networks with capital investments in inorganic acquisitions, and then optimize that network over time in our 43 markets in 19 states, I think has proven our ability to grow volume in that 2%-3% zone. So that is the right marker for us for long-term volume growth.
Both our past trends and our investment profile as we sit here today and as we forecast into the future supports that.
Mike, last week, some of the med device manufacturers at a competing healthcare conference talked about softness or slower recovery in surgical volumes, especially ortho, I think, is what we heard. I know you don't comment intra-quarter on trends, but maybe if we can look at what the trends were like exiting Q2 as it relates to maybe ortho procedures, just in light of some of these comments that we're hearing from the device guys.
Well, let me just anchor on second quarter.
Yeah.
Let me do that. As I think about second quarter for surgery volume, the big call-out is really elective surgery. Our emergent surgery growth continues to be good and pretty consistent with our past trends. So it's elective. On the inpatient side of elective, and frankly, on the outpatient surgery side as well, the biggest issue is HIX. This movement out of HIX to uninsured as people in our communities have lost coverage on the exchanges become uninsured, they generally lose access to elective care. So you're seeing that is the primary driver of the slowdown in our elective surgery volumes is exchanges. The second component that I would call out would be the Medicare Inpatient-Only List. For inpatient surgery for Medicare, we're in year two of a three-year phase out. For this year, the procedures that were most impacted were orthopedics and spine.
That is an aspect that we are seeing in Medicare that are moving more to outpatient this year because of the phase-out of the Inpatient-Only List. Then the third thing that, and it is early, so this is still a bit of a hypothesis, but we believe that we are seeing some consumer sentiment on elective surgery given the economy, inflation, energy costs, and the like. Our early read is we think there could be some deferral of elective care right now that we saw in the second quarter that also was maybe the third and the lesser of the three drivers I have mentioned on elective surgery.
Mike, when we think of the Inpatient-Only List, HCA owns a big network of ambulatory surgery centers, right? Maybe if you can just walk us through how to think of your strategy to take advantage of the Inpatient-Only List.
Well, we are a hospital-centric network healthcare company. In our 43 markets, in our 19 states, we try to build comprehensive healthcare networks in our markets. We will have hospitals, including hub hospitals for acuity and spoke hospitals out that play a community hospital role. Then we will surround our hospitals with network assets. Think about urgent care centers and freestanding emergency rooms and ambulatory surgery centers and physician clinics with the idea of making it easy and convenient for patients to access our network when they need low acuity care, and then as they need higher acuity care, to make it seamless and convenient for them to access our acute care hospitals or our ambulatory surgery centers as they need it. Surgery centers for us play a role within our network.
They help us secure our surgeons, and they have an investment opportunity in our surgery centers, and then they tend to work in our inpatient facilities when they need to do inpatient care. As cases move, and they do from time to time, we can go back to total joints as an example. As cases sometimes move from inpatient to outpatient, we have the facilities, the surgeon community, and the access for patients at all levels of care. I think about surgery centers as playing that role for us in the market. We do. We have a nice network of about 150 surgery centers around our markets. But they play a network role for us in-market, which is a little different than some of the other hospital companies.
But that's the role it plays for us, and I think it helps us when cases do go through transitions like that, we have a place for them to go. We tend to have a medical staff that's connected to us on the inpatient side and in the surgery center side to make it seamless.
No, that makes a lot of sense. Maybe just to the other point you made on consumer spending, consumer confidence, macro, one of the things that we've always thought about with HCA is that you are in some very attractive, economically positive or strong markets even. How does that all factor in as you think about the broader hospital industry's growth or performance versus yours?
Well, it helps us. The hardest thing to change about a hospital is its zip code. It's pretty hard. Once you enter a market, you're married, and there's no easy divorce here. Having these 43 markets that are mostly in the southeast and the southwest components of the U.S., our markets tend to have higher than average population growth. They tend to have stronger economic performance, higher levels of employer- sponsored insurance coverage. These are really good markets that we like. That, by definition, is helpful to us on both demand and payer mix over time. But if I think about 60% of our states are in non-expansion states, right? In today's world, what that means is that we have a little bit more exposure to the healthcare exchanges than some of the other markets that were more expansion oriented.
That's a factor. Broadly speaking, I think patients are experiencing a little bit of this consumer sentiment right now because of the factors we mentioned earlier, the cost of insurance premiums, the energy cost, and the like. What we're seeing this year is that our patients are owing a little bit more from benefit design on employer- sponsored insurance, even a little bit on Medicare Advantage, and then certainly on the exchanges. There's a bit of movement from silver to bronze, and they're owing more. At the same time, given the economy, they're not paying us more. It's one of the pressure points this year, is that we've seen a little bit of slowdown in our ability to collect out-of-pocket amounts due, and they owe a little bit more. So it's part of what we think consumer sentiment is having an effect on us.
Now, we're navigating that. I wouldn't call that a really significant impact, but it's not nothing. I think that's the piece that we're highlighting on our second quarter call.
No, that makes a lot of sense. Maybe taking a step back, once we get past the HIX headwinds this year, maybe some of the macro, how do we think about the growth algorithm for HCA longer term?
Yeah. I think about 2026 is a year of getting through this reform environment. Likely there'll be a bit of that next year, too. We said on the call, and we would reiterate, I don't think 2027 for the exchanges will be as bad as 2026, but I think there will be further impact in 2027 that we'll have to navigate. You've got the start of the Medicaid work requirements in January of 2027. The 40% of our Medicaid revenue states that are expansion states, we're going to have to deal with that. I think that'll be manageable. But get us through 2026 and 2027 as we can navigate that. As I go out further in time, this long-term plan that is supported by our strategic initiatives, we still believe has a lot of merit. I'm bullish on the performance of the company.
I think this idea of 4%-6% growth in top-line revenue with at least margin maintenance, which over time, we hope to do better than that, but at least margin maintenance gives us a 4%-6% growth in EBITDA. Then given our capital allocation approach, we think that that produces a nice impact on earnings per share growth with share repurchases that have been durable. Yeah, I'm still bullish that that formula will hold as we go into the future. But that's the durability of healthcare. It's the durability of HCA that will be at play there.
No, it makes a lot of sense. I know we've talked a lot about volumes already, so I'll shift to the other side of revenue. When we think about rates, what are these discussions with managed care today like, given where your cost inflation trends are and the pressures that they're facing on the other side as well?
Yeah. When I think about rates too, let's start with Medicare even. I am actually pleased for both our inpatient and outpatient proposed rule updates for Medicare for 2027, and that's a good factor of support for us as we head into next year. Broadly, and we talk about this often, we're moving through our contract renegotiation schedule, and we're over half done for next year. We're making good progress through it. Those are tough negotiations and the like. But generally speaking, I think about the factors that support our pricing objectives, the continued inflation that we see in the marketplaces, the challenges that hospitals are under related to the exchanges and Medicaid reform. Then frankly, even some of the friction, of denials and underpayments and the like.
We are still able to negotiate and get a rate update, largely consistent with our target ranges here as we have completed the contract negotiations here halfway through the year. We've also been working over the last really 18 months, call it going on two years now, with some partnerships with our major payers. With really now about five of our major payers, we are entering into a partnership structure around digital data exchange, around improving the environment, around friction. We're finding good support from our key payer partners to work on this together. This is an industry-wide thing. This claims environment needs reform between providers and payers. I feel like the discussions that we're having with most of our major payers are very productive. I'm hopeful that over time this continues to improve.
Mike, if we can double-click on that, just the friction aspect of it, right? Because rate is one thing, but we're hearing it more and more across the healthcare ecosystem that the payers are making it harder for providers to bill and collect, and whether that's down-coding, claims denials, prior auth. Is there a way to contractually address some of these things?
Well, this is not a new problem. The payers have been working on managing their in fairness to them, they've got a medical loss ratio to manage and a patient population to manage, and they've been working really hard on their version of AI, in their claims shop. I know there's a lot of talk about AI in the hospital revenue cycle. We're behind the payers, in my view. We have been working. This is not a new issue. There has clearly been a growth in friction over the last several years. I would say the activity levels have continued. HCA, and this goes back really now to end of 2022, we started investing pretty heavily in our ability to respond to denials and underpayments and investing in our payer line revenue cycle with people. We've enhanced our processes, and we've added a lot of technology.
Mostly pointed at this denial and underpayment part of the business. I feel really good sitting here today about HCA's ability to respond to that environment and then continue the conversation with our payer partners about dealing with friction at a strategic level in the future. The administrative cost that they have and that we have to administer all of these claims is enormous. We do have the opportunity to help each other here. I think that we will see that play out in the future. We got to live in today, and today there's still friction. I do feel like there's a pathway to make it better over time.
That's great. Maybe just last question on the rate side. On the Medicaid front, Virginia approved their State Directed Payment program after the second quarter earnings call. Any chance you can quantify what that looks like for you guys?
No chance. None. If I pull up, I would say this. There were five states that when we kind of came into the year, we had been working really hard on as part of grandfathering. Florida's the big one, and obviously in second quarter, Florida pulled through in a big way. We're very pleased and encouraged with that. Georgia, Virginia, Colorado, et cetera, have now all—
Yep.
—gotten approved, which is really good. There's a lot of moving parts as we go to finalize, once it's approved by CMS and get the final calculations and allocations. I still largely think as I sit here today that the guidance that we gave at second quarter of moving our net benefit to $300 million-$500 million is still largely in the range, including Virginia at this point.
Okay. That's very helpful. Maybe shifting gears a little bit. One of the things in our minds that differentiates HCA is the level of reinvestment that you make in the business, and your CapEx levels are generally higher than some of your peers. When we think about where you're investing that, a lot of it's in capacity, it seems like. How do we think about the flow-through of the additional beds that you're adding and what that translates into as a growth number going forward?
Yeah. We're sitting here today after several years of continuing to increase our capital investment spend into our facilities and add beds. We've been averaging about 600 bed additions a year over the last several years. At the same time, we've been working on length of stay, and we continue to work on length of stay, and that's an important part of our resiliency plan is optimizing our inpatient throughput. Yet, because of the volume growth we've seen over the last several years on the inpatient side, we're still in kind of the low to mid-70s on occupancy rate. As we think about our projections for the future, we're taking into account what we continue to see in terms of demand growth in our markets, which continues to be good. Maybe especially given the markets we're in. We are projecting continued improvement in inpatient throughput.
I'm really pleased with our overall resiliency effort, but length of stay is a good example of that. It pays dividends. It's the cheapest way to add capital capacity by not spending a nickel of capital, so it's important. I think between continued rational, but continued improvement in our inpatient bed capacity through our capital spending and continued improvement in length of stay, we're going to be able to service that demand growth, handle market share improvements, and continue to keep occupancy at a rational level. This kind of call it low to mid-70s is a good spot for us. When it gets too full, it starts to jeopardize your ability to take on additional volume growth. If 75% is your average, think about your most full hospitals, and they get pretty full.
Adding capacity is one component of our long-term capital strategy that we try to meter based on what we're seeing on demand and our ability to reduce length of stay. When I think about the rest of our capital spend, we continue to add operating rooms into our hospitals as needed. We continue to add emergency room bays in our ERs. We're adding service lines with this idea of continuing to acuitize our platform, both deepen and broaden our service lines in the markets we serve. Then we jump over to outpatient. We've seen good expansion of our outpatient network in the last two years. We've highlighted that. We were at 12 to one outpatient facilities on average per hospital at our Investor Day in 2023, and we're over 14 now.
Our goal, based on what we're seeing in our markets, is that that would likely be 20 outpatient facilities per hospital by the end of the decade. That reflects what we're seeing for demand in our markets and just the value of having a comprehensive network of ambulatory sites to support your hospitals. So, we use our capital spend for both, for adding capacity as we need to, for doing the kind of normal routine maintenance type capital and keeping our facilities competitive, and then building out our network. That has been working, we believe. We just continue to see really good opportunities in our markets to expand and optimize our networks, and it's really our key growth strategy when I think about our key strategic initiatives over the next five years. That's still number one.
That's great. I was going to ask you a capital deployment question, but since you mentioned resiliency, it's one of the things that we haven't spoken about yet. You guys have done a good job with the resiliency plan, and it looks like second quarter, you saw an uplift there. How do we think about the remaining runway to drive efficiency gains, productivity gains as part of the resiliency plan?
Yeah. I always like to go back and ground. Our resiliency plan really has four key areas of focus. The first one is revenue integrity and clearance. Again, back to things like denials and underpayments and the like, it is a huge part of building resiliency, is being able to collect the revenue that you are owed under the contracts you sign. That is number one. Number two is asset optimization, which we have just talked about, but it is inpatient throughput, but it is also ER and emergency room throughput, operating room throughput. We are a capital-intensive business. We are a bit of a fixed cost business, so getting really good turns on your assets, a key part of building resiliency and being able to grow volume, and keep your capacity open. Number three is variable cost, and I agree with you.
I think HCA over the years has done a good job of producing operating leverage from our volume growth and being efficient. Fourth is fixed cost, which we are working on at corporate and our shared service platforms and in the field. Those are the four focus areas. Resiliency for us really started during the pandemic. The pandemic taught us that we had to be more resilient to respond to a really challenging environment. We have been building on that programmatically since then. We even mentioned it, as you may recall, at Investor Day in 2023. As I think about where we are today, we continue to both deepen and strengthen this program. It is multidimensional, multi-year. It is a capability now and not just a point solution for the company. It is gaining strength, and you saw that in second quarter.
What we are seeing across all of our work streams in resiliency, we have good line of sight now through the balance of this year and into 2027, and feel like that it is a program that is one of our really top five strategic initiatives as we go forward. We are thinking about 2027 beyond is really financial resiliency 2.0. It is going to be driven even more by digital transformation and things like AI and automation. We continue to build global capabilities, which are supportive of this transformation of our cost structure. We are continuing to elevate our benchmarking capabilities, both internally, but even more now externally against the Fortune 100, especially in our shared service platforms, which are so important to us. Lastly, we are finding more and more opportunities to expand our shared service platforms and take on even more operational support and administrative functions.
We feel like that it is a program that has produced good benefits for us this year, but that it will continue into the future.
Mike, we're at the end of our time here, but I would love to give you the opportunity to leave some parting thoughts for the audience and for those in the webcast. What is it that they need to be thinking about as it relates to the HCA investment story?
Yeah. I think we're set up good, very well for long-term performance. Our mission is the care and improvement of human life. So we take that very, very seriously. As part of that, when I think about our markets and the patients we serve, we're 320,000 colleagues taking care of 50 million patients a year. That scale gives us the opportunity to really bring the best of business to the best of healthcare. The next five years are going to be driven by an investment story driven by digital transformation, which we're finding huge opportunity to leverage. Workforce development, and I think about the investments we're making in Galen, The College of Health Care Professions that we just acquired, the expansion of our graduate medical education programs and clinical education.
Workforce is a key imperative for this company, and I'm really proud of the work that we're doing, and I see that advancing us over the next five years. We've already talked about resiliency, and growing our resiliency organizationally and our networks and financially is a key part of our ability to navigate the environment we're in, but produce long-term results. So I think the future holds good durability of demand and good performance in the company, and turning that into a long-term success story.
Amazing. Thank you so much, Mike.
Thank you.
Thank you, everyone.
Thanks, everyone.
Thank you. That was awesome. I appreciate you doing this again.