Good morning, everyone. On behalf of Morgan Stanley, I'm delighted to have Bill Rutherford, Executive Vice President and Chief Financial Officer from HCA here, along with Frank Morgan, Vice President of Investor Relations. Thank you all for coming. I'm gonna read a brief research disclosure. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Well, guys, I'm just gonna throw-
Great.
Sort of different categories: demand, labor, regulatory, et cetera.
Okay.
So let's talk about volumes. Obviously, the last couple of quarters, we've seen a return to more normalized volumes here. How much of that do you attribute to sort of pent-up demand from COVID versus, okay, you've been investing a great deal of capital into your facilities, particularly on the outpatient side? How do you think about that, and how do you see the trends continuing before? Are you still seeing pent-up demand?
Well, it's a great question. It's hard for us to really discern how much of kind of the volume, at least we saw in the first half of this year, was pent-up demand versus just a return to kind of normal activity. We see, I think, some positive macros. Obviously, we operate in great markets. Many of our markets have experienced probably outsized population growth. We're still seeing really strong economic indicators, full employment area. I think the exchange enrollment helps support that, and people returning to normal in a post-COVID environment. And so we've been very pleased with kind of the volume profile, as we went through the first half of this year, and as we've said publicly, we think there's gonna be a return to kind of normal seasonal patterns and normal volume on there.
So my sense, it's more of those macros that are leading to it than than pent-up demand of care that was deferred. I think by now, most of it has probably worked its way back into the system, but I think people are just, more comfortable and back active in, in their community, and that's yielding a, a certain, demand that we're seeing.
Great. There's also been a real burst in your emergency room volume, particularly in the commercial payer side of the emergency room volume. What do you attribute that to? What are the factors you think about?
Yeah, when we look at fourth quarter emergency room volume and first quarter in particular, it definitely outpaced our expectations. I'm not so sure if there was one thing that we would attribute that to. I mean, we were seeing 9% emergency room volume in one period, almost 10% in another. I think that settled back, and I think we'll return to normal. I think there were probably a host of factors. I think there was a heavy flu season towards the end of last year, maybe early part of this year, that may have influenced that, and again, I think just more return back to activity that we were seeing. You know, we're trying to hold on to those as much as we can, but I don't know if those will continue at those levels going forward.
I think it will return to more of our historical patterns over time.
Great. You know, and obviously, there's been a great deal in the press over the last six weeks about new variant of COVID. Have you seen an increase in activity in ER visits as a result or ICU admissions? What have you seen in terms of any activity related to COVID?
I think it's fair to say we would, we would see what is typically going on across the country, and it's going up a little bit. I haven't... I can't give you specific numbers yet.
Right.
When we report third quarter, we will. But I can tell you, it's nothing like that we saw-
Right
... during the COVID spikes that we saw in 2021 and early 2022. But sure, we would see what, what you would read about or the typical kind of growth in COVID right now. We're seeing a little bit of it.
Gotcha. Let's maybe switch gears to labor.
Mm-hmm.
You know, obviously, it, you know, looks like the first half of the year, you did a really good job in terms of managing labor costs. Some other companies struggled with it, particularly on the nursing side. What are the key factors that have enabled you to really, you know, focus on those costs but also control the costs, too?
Yeah, so it's, as everyone knows, that was the number one topic as we went through last year.
Right.
And our labor costs really peaked at a high level in first quarter of 2022, you know, really disrupted by the COVID surges, and we're really pleased with the progress we've made since that point in time. It was really generated by a high use of contract and premium labor, so our focus was to reduce the utilization of that premium labor. As the labor market tend to settle, you didn't have the disruption with COVID surges. That benefited us. We were able to reduce not only our average hourly rate for contract labor, but we were able to reduce the number of hours, and we made investments into our employed workforce that helped stabilize that. We saw turnover being reduced, we saw recruitment going up, and so that ended up stabilizing the labor cost, and we're pleased with that trend.
We made investments into our employed workforce, but we were able to compensate or pay for those through the reduction of the premium labor. And that really carried us through the second half of 2022 and into the first half of this year.
What are you seeing then in terms of wage increases? Let's say, here we are, September 2023 versus last year when you're thinking about it, and you're getting ready to go into-
Yeah
... the budget cycle in a month or two. What are you sort of seeing this year, and what do you think next year when you sort of think about, you know, wage increases overall in the work?
Yeah, you know, we're going through our planning cycle to kind of forecast that. We had to make and did make some outsized wage, wage adjustments in the last half of last year to be responsive to the market. I don't see us having to do that at the same level of last year, and I think over time, wages should blend in that 3%-3.5% range going forward. I think if it's in that range, we can manage through that.
Okay. You've also, HCA seems to have, you know, went on the strategy of sort of, you know, let's, let's build and buy our own nursing schools. Let's create our own labor force. Maybe you could just walk us through what the latest on that is. I know the Galen School-
Yeah
-of Nursing is a big emphasis, but how many ultimately, you know, let's look out three to five years, how many RNs do you think you're capable of turning out of these schools?
Yeah, I mean, we were very fortunate to bring Galen College of Nursing into the fold early on before all this labor market disruption. And you can hopefully see the strategic implications of that. We're one of the largest employer of nurses in the country. They're quickly becoming one of the largest educator of nurses in the country. And our goal is to have a Galen campus, a Galen College of Nursing, in every one of HCA's market. Some of our big markets are maybe even more than one. You know, I think we're up to 14, 15 campuses right now, probably 13,000 students enrolled. We have plans by, in the next couple of years, to be up to 25 campuses and potentially even 30 campuses by the end of the decade.
I don't know exactly what the enrollment will be at that point in time, but it could potentially reach, you know, 18,000-20,000 enrollees by that time. And so as we can think about the integration of a school of nursing and a provider where the students can do their clinical rotations in our hospitals, where our existing faculty, our existing nurses can serve as faculty at those schools, it's a nice strategic overlap. And hopefully, we'll, you know, be a major channel, if not the major channel of our sourcing the nurses into the future.
So what, what's the capital investment? Let's just use a, you know, you open a school in a-
Yeah
In a market like Las Vegas or Austin, Texas, or something like that. What's the capital investment to create the school and then the, you know, roughly the annual operating cost that you might see?
Well, each one's a little different based on the size, and there's some start-up costs. We've been fortunate that most of the campuses that we've opened up have, have really ramped up very, very quickly. We opened one up in Nashville. The start-up costs, let's say, when in the backdrop of HCA, is fairly nominal per campus. Many times, it's leased space, and we have to do some build-outs, and then you do some start-up with marketing, enrollment, and so forth. So we can open those campuses at a, at a fairly efficient level. Yeah, there's some incremental costs, but it's not material on a, on a per-campus level. Then, hopefully, we're opening them up in these markets where they're ramping very, very quickly, and so it doesn't create that much of a burden, and those campuses become productive relatively quickly.
Thanks. Last quarter, on the call, you highlighted the fact that you're starting to see some increases in hospital-based physician costs.
Yeah.
Like, I know anesthesiologists, emergency room physicians, hospitalists, et cetera. Can you give us an update on that, and what do you think is driving that? Because obviously, some of the companies that provide that have struggled, but what's sort of driving that, and what sort of increases are you seeing?
Yeah, well, I think that area is going through a lot of disruption. I mean, obviously, you're seeing that with companies that have rolled up these providers having trouble. And as a hospital system, we have to have the provision of those emergency room doctors and anesthesiologists, and we often find ourselves having to land those programs and when they're in somewhat of a distress. Or we're having to respond to requests for increased subsidies to try to help stabilize those programs. So there's pressure in that area, as we've talked about publicly, and we're having to respond to that, and we think we can respond to it over time.
It's hard to call exactly where we are in those cycles, but we've had many instances where programs have kind of said, "We're no longer in it," and you've got. We have to take it over.
Right.
And I think there's some factors that are influencing it. I mean, they had revenue pressure because many of them couldn't get in-network with some of the payers. They had their own wage pressures that they were experiencing with the labor market. I think many of them, you know, had some private equity participation, and they didn't have the balance sheets to navigate through these cycles. And we're having to land those very quickly in a period of time of distress because we have to have those provisions of services. So, you know, we're doing our best to manage through it, and I think we'll need a little bit more time to call to see what the long-term impact of that will be.
Okay. Let me switch gears a little bit.
Mm-hmm.
Let's talk about some of the recent partnerships and investment in technology.
Yeah.
Augmedix, Google. Maybe you could give the audience just an overview of what those relationships are, what it means to you, what you're hoping to accomplish by these partnerships with each of those companies?
Well, we think there's a tremendous opportunity to continue to differentiate HCA through the investment in technology and innovation. Clearly, there's a lot of opportunities we believe within healthcare. So we entered into a large strategic relationship with Google last year to take advantage of their capabilities and engineering resources in our healthcare setting, and we have multiple kind of initiatives underway. We have an initiative, we call it Care Transformation and Innovation, led by a physician, Dr. Michael Schlosser, where we're looking at what can we take, and how can we use technology to improve routines that go on inside the walls of the hospital or inside the room. So we have things around scheduling.
How can we predict volume and acuity of patients better, and then how can we schedule our own staff better, satisfactory to our staff, better scheduling, better outcomes for the patient?... We have an investment, you mentioned on Augmedix, which is really ambient listening, and how can we improve documentation through listening and through documenting interactions between caregivers and patients into the record? And as you get better and more complete documentation, then you can provide better next decision points on there. So we have a host of initiatives and commitments that we're making in this technology innovation, trying to use large language models. We are undertaking an effort to replace our core clinical systems as well and move much of our data structure into the cloud, which will facilitate it.
So it's a major initiative that, the company's committed to in the next couple of years that we think has tremendous value to improve the experience of our nurses, to be more attractive to our caregivers, provide a better experience to our patients.
I know that Sam Hazen, your CEO, was an early adopter of using ChatGPT.
Yep.
So what do you see in terms of the impact, potentially, that AI could have on, you know, on your, on your business?
I think it's tremendous, and I think it's even too early to even visualize all of those. We have multiple initiatives in these large language models. I tell you right now, we're focused more on the administrative aspects, to make sure we learn and can, you know, understand the capability that eventually will move into the clinical aspects.
Right.
And the administrative aspects, you know, really around how do claims get paid and adjudicated, especially when you think about this process of reviewing medical necessity and denials, where historically you'd have a nurse or a human go through the record and go through clinical documentation and justification. Now, we can put large language models over here and help, you know, document the medical necessity of these cases and really become a lot more production-oriented in that effort. So honestly, I think sitting here today at this stage, it's almost unlimited what the potential would be, but we have a number of use cases that we're applying through the organization to, I think bring better value.
Okay. I want to talk a little bit just now about what's happening in the regulatory environment, and, and maybe in particular, focus on, you know, that, that terminology of site-neutral payment.
Yeah.
There seems to be some renewed focus in Congress on site-neutral payment programs. There's a bill in the House Ways and Means Committee looking at site-neutral. I think one of the Senate committees as well is looking at it. What's the latest? And it seems to be focused on drug administration and prescription of drugs. What can you tell us about that, and where does that-
Well, I may ask Frank to add in here in a minute because he's staying close to the regulatory piece. I think it's evolving, and from what I understand now, it's mostly tied to Medicare outpatient drug administration. If that's the case, that's... I don't think will have a material impact on us. But as it moves in and if it moves into hospital-based outpatient reimbursement, it could. But, you know, those would be big moves, and I think there's enough policy process that you would have to go through and enough impact that, you know, there'd be a lot more conversation before anything, I think, material could implement. And, Frank, I know-
Yeah
... you're staying close to that.
Yeah, and I think, I mean, probably the bigger concern away from this bill specifically is just, is this the first step in a slippery slope? And, I think when we talk about it, we talk with our governmental affairs people, we believe that any incremental movement would require additional legislation, so it would be a very difficult process along the way. So I don't think it's anything that's gonna move from one extreme to the other very quickly. I think it, it'll. If anything happens, it'll seems like it'll be more in this drug administration area for now.
Focused on the outpatient, yeah.
Yeah, and very specifically.
Focused on Medicare outpatient, which wouldn't be-
Right
... material for us. And, you know, there's been over the years, this isn't new, there's been topics around site neutrality before, and when you get into the detail of how to administer that, it can be very difficult and be somewhat impactful. So that generally elongates, you know, how much policy changes could occur, how quickly.
Right. Maybe you could also just discuss, you know, the Medicaid supplemental payment programs. In particular, there's a couple of states, Florida being one where there's some debate going on about the supplemental payment program there. What's, what's the latest? What are you hearing?
Each state has its nuances regarding the supplemental payment programs that are really unique to the dynamics of that state. Florida is waiting for CMS approval for their DPP, their Directed Payment Program, and so the timing of when that occurs is unclear. There's a lot of dynamics between the CMS and the states. I think last year, the approval came in, in the third quarter. The previous year, it came in in the fourth. So we think eventually that program will go forward, and, and will get approved, but it's unclear exactly when the timing, of that will occur. And again, each state has its own nuances. Texas has historically been our large supplemental payment program. We have programs now in Georgia. There's one being contemplated in North Carolina. There's one contemplated in Nevada that probably is a next year event.
So we try to stay very close to those, but each one unfolds at a little bit pace and timing on that.
... Let's talk about the relationships with some of the key payers out there. What, where do you stand here in, you know, mid-September in terms of, you know, having contracts locked in with the major payers? Anyone that's a holdout that you're concerned about?
You know, over the years, we really value our strategic relationships with major payers. We've tried to evolve that relationship to be much more of a contract transactional to more of a, a strategic opportunity. And so we're pleased with the progress and the relationship we have with our major payers. And I, I think that shows itself in the pacing by which we're able to secure contracting. I think we're 70% contracted for next year at reasonable rates, and I think we're probably 30%-40% for the year after that. So to me, that gives an indication that we're able to secure our contracts at reasonable rates and pacing. I mean, obviously, when you go into the negotiation table, there, there's always a discussion.
You know, we come to the table why we should be paid more, they come paid less, but we tend to find common ground on that. So again, I think we're pleased with mostly the relationships with that we have with our major payers, and able to secure contracts at an appropriate level.
Okay. So I know you're just beginning the budget cycle, as we discussed earlier. So maybe you could just walk us through your latest thinking on capital allocation, you know, between, you know, existing facilities, new facilities, outpatient versus inpatient. You know, it's a multi-billion-dollar budget. Maybe you could just walk us through.
Yeah. I mean, our capital allocation philosophy has been such a tremendous value add for us over the years. You know, unfortunately, we're blessed. We have a lot of resources to be able to think about investing. Our first priority is to invest capital into our existing markets to meet what we view as growing demand for healthcare in our markets. And so we first size what is the right capital investment for us, and you've seen us grow that. And that is an indication of the opportunities we see to put capital in the market to meet growth opportunities. Let me come back and talk about that for a minute, about how do we allocate capital.
Our second one is to maintain the balance sheet in a really strong position so that we can be opportunistic as, you know, either strategic M&As, opportunity showed itself, and our balance sheet, our leverage is at the low end of our historical ratio, we think is in a very good, good level. Historically, we paid a relatively small dividend, and then, and then historically, the balance of our free cash flow has been dedicated to a share repurchase program. In some years, like in 2021 and 2022, we had an enhanced program. So it's a pretty balanced allocation of capital that I think helps drive long-term value to a lot of our constituencies. In our capital deployment, I think roughly 40%-50% of our capital is routine maintenance replacement, but 50%-60% is growth capital.
In the growth capital, think about three kind of domains. One is adding inpatient capacity, and we have to add inpatient capacity, so we have the bed capacity to meet growing demand. We're running, and sometimes some of the highest occupancies we've had in the low 70s. So we have to put inpatient capacity on the ground in order to meet what we see as continued strong inpatient demand in our market. So that consumes a lot of our dollars of capital. It may be new hospitals, it may be expansions of wings or building onto our existing campuses. The second domain is in our outpatient or network development. Think freestanding EDs, ambulatory surgery centers, urgent care, really building out the network. There's a lot of that activity. I think we have 50-60 freestanding EDs in our currently approved pipeline. So there's a lot of activity.
It doesn't consume as much dollars because the investments are lower, but a lot of activity in the outpatient network development. And then the third area, I just classify as more program development, and it may be expanding surgical suites, it may be a robotics program, it may be expanding a cardiology program, where it's very targeted to certain programs by market on there. And again, we see that opportunity growing. To me, what we see as growing demand has helped facilitate, you know, over time, our ability to grow market share.
You know, on going back to the question, you know, the bucket that's allocated to M&A.
Yeah.
I assume, is there still a robust pipeline you're seeing on the not-for-profit side? What, where does that stand here? I know-
Yeah
... coming out of COVID, you know, there was some view that maybe there would be that opportunity, but-
Yeah. It ebb and flows, as you might imagine. There are a lot of dynamics when it comes into the hospital M&A. I mean, we have to pay attention to the FTC and their activity in looking at those. We see from time to time, opportunity to do smaller M&A in existing markets. We may have one or two-
Right
kind of hospitals at any one time that we're rounding out an existing network. But when you think about the large-scale hospital M&A, it would largely be new market opportunities for us in a not-for-profit. And those are difficult transactions to progress. They take time.
Right.
Generally, there has to be a reason for those systems to sell us. So those conversations ebb and flow, you know, and we'll just have to see where that plays out. In the meantime, we see opportunities in the M&A for network development, mostly around the outpatient side. You've seen us do urgent care, you've seen us do some freestanding ED, some ambulatory surgery. So I'd say it's more smaller, complementary than these larger acquisitions, and so that gives us the opportunity to deploy capital through our existing programs in our existing markets. You know, we can invest couple billion dollars maybe in DFW to be productive over time, as maybe putting that kind of money in a new market.
Gotcha. I think what I'll do is just open it up to the audience if there are questions. Let's in the back there.
Hey, Bill, among the sell side-
There's a microphone coming your way.
Hey, Bill.
Yes.
Post Labor Day, amongst the sell side, there seems to be a debate about how to model the second half seasonality of your business on both the revenue side and the EBITDA side. Can you just offer some perspective in terms of how you want us to think about modeling seasonality for the back half of the year?
Well, I think what we said historically, that we believe recently, is that we think volume patterns will return to normal seasonal patterns. You know, obviously, we 2021, 2022, we had COVID disruption, it was hard to call. 2023, we haven't had the COVID disruption. So all of our beliefs is we'll return to normal seasonal volume patterns, where ebbs and flows as you go through the calendar on there. And we'll need time to see how that plays out, but that's our fundamental belief right now, absent anything different, that those volume patterns should trend what they would have historically done pre-COVID. If you go back to 2017, 2018, 2019, we think that we'll return mostly to those type of trends.
Those would be essentially, you know, correct me if I'm wrong, Q4 and Q1 being the strongest.
Yeah
... in terms of volume, and the summer being sort of the-
I think that's right. Yeah, that is right.
Other questions?
Thank you. What trends are you seeing on the procurement side of the business, particularly for equipment, on the logistics side of the business?
It's improving. If you're talking about procurement on equipment or supplies, you know, we're very pleased with our team's efforts around our supply chain processes during COVID. We were fortunate, during COVID, we were able to extend many of our contracting. So we, we had some firm pricing in when we were in these peak inflationary periods. And so now that those contracts are coming up, we don't see the inflation levels, quite the levels that they were. And so we're seeing a little bit of increase, but we're managing through that at, at, at very decent levels. And we think we can manage that through what's embedded in our guidance, and, and we're seeing our teams procure new contracts at reasonable rates.
You know, the other factor we had to deal with, you know, probably 12 to 18 , was just more the logistics, the time to order, whether it be even in our construction. So supply chain disruption, and how quickly could you get equipment to be able to open up a new project? And a lot of times we had to buy ahead, in order to compensate for those supply chain challenges and just in terms of timing and delivery. And we're seeing that. We're not out of the woods on that, but we're seeing that improve. So again, I hope that eventually returns to some level of normal level. Excuse me.
All right. Well, thank you all very much.
Yeah. Thank you, Jim. Thank you, everyone. Take care.