In the second quarter of 2023, HCA Healthcare reported solid earnings, reflecting strong demand for their services and healthy operating margins. CEO Sam Hazen and CFO Bill Rutherford provided some prepared remarks and then took questions. The company updated their earnings guidance for 2023, and diluted earnings per share increased to $4.29. The call was recorded and a replay will be available later.

HCA Healthcare saw strong growth in same-facility volumes, driven by emergency room visits and outpatient surgeries. They also saw improvements in labor metrics, with nurse turnover decreasing and contract labor costs decreasing by 20%. Additionally, they improved bed capacity, reducing instances where they could not accept patients from other hospitals. HCA Healthcare is confident in their strategic and capital allocation plans to provide higher quality care.

HCA Healthcare recently announced that an unknown party had made a list of certain patient information available on an online forum. The list did not contain any sensitive information and the company is taking the incident seriously, notifying affected patients and being named as a defendant in multiple class action lawsuits. Despite this, the incident has not disrupted operations or impacted the company's business or financial results. HCA Healthcare is committed to protecting patient privacy.

In the quarter, HCA Healthcare's consolidated margins were reduced by approximately 30 basis points due to a transaction that mitigates business risk with the Envision bankruptcy proceedings and aligns hospital-based physicians and hospital care teams. Additionally, the company recognized a $145 million payer settlement, which kept their adjusted EBITDA margins consistent between the first and second quarters. Cash flow from operations increased to $2.475 billion and capital spending was just over $1.2 billion. The company paid $164 million in dividends and repurchased $915 million of their stock. Their debt to adjusted EBITDA leverage ratio remains near the low end of their stated leverage range. They updated their 2023 guidance, expecting revenues between $63.25 billion and $64.75 billion, net income between $4.9 billion and $5.255 billion, adjusted EBITDA between $12.3 billion and $12.8 billion, diluted earnings per share between $17.70 and $18.90, and capital spending to approximate $4.7 billion.

Sam Hazen commented on the performance of the company across divisions, noting that 13 out of 16 divisions saw admission growth and adjusted admission growth. He also highlighted that 72% of the hospitals had greater than 2% admission growth and 50% had inpatient surgery growth above 2%, attributing this to the strength of the markets, the competitive positioning of the facilities, and the ongoing network development and physician development.

Bill Rutherford answered a question from Ben Hendrix regarding the company's updated guidance for the second half of the year. He stated that the margin profile of the company should be slightly better in the second half of the year, with salary, wages, and benefits as a percent of revenue running mostly where they are running year-to-date. Professional fees have seen a little pressure, but the company expects to meet through that. Contract labor has improved 20% year-over-year and has also improved sequentially between Q2 and Q1. Hiring metrics are up and turnover is down, and contract labor cost as a percent of SWB was 6.8% in the quarter.

Bill Rutherford discussed the favorable payer mix in the quarter, which was reflected in the commercial trends. Managed care admissions were up 4% and adjusted admissions were up 5%. Emergency visits managed care were up 9.8%. The Valesco joint venture is 70-75% of the revenue in SWB and is a breakeven proposition north of $220 million of revenue. Justin Lake asked about pricing and acuity in the quarter, and Rutherford responded that the strong payer mix and acuity drove the pricing.

Bill Rutherford states that he expects the volume trends in the second half of the year to be consistent with what was seen in the first half of the year. He also expects the margin profile of the second half of the year to be slightly better than the first half, and this is the main reason for the guidance raise.

HCA has seen an increase in their margins compared to 2019 due to their ability to adjust to the labor market and hospital-based physician dynamics. They have also seen an increase in their market share. Ann Hynes asked about the impact of Medicaid determinations on their business, and Bill Rutherford responded that it is still early but they have an organized approach to monitoring and responding to the market. He also mentioned that the KB determinations are part of their guidance.

Sam Hazen discusses how Covid-19 has not had a negative impact on the company yet and that their teams are trying to help those who have lost their Medicaid coverage to get re-enrolled. He believes that there could be some positive trends from this in the long run, but they will have to wait and see. He also addresses Kevin Fischbeck's question about volume growth in the back half of the year, saying that last year, as Covid-19 became less of an issue, volume started to normalize in the back half of the year. He believes that the growth rate in the back half of the year should remain similar to the first half.

Sam and Bill are discussing the backdrop of volume for their markets. They are seeing population growth across the board, and they are investing in strategies to increase market share. They are also seeing that commercial admissions are outpacing total admissions, which is reflective of a strong economy. Bill is trying to reconcile these factors when projecting going forward.

Sam Hazen and Bill discussed the impact of Envision's physician staffing, which has been a 30 basis point drag on their performance. They have had to respond to the difficulties in the hospital-based physician space by bringing in in-house capabilities, which has been a challenge. However, they have the largest pipeline of projects in motion, which should have a positive impact on their capital in the later years.

HCA has been able to increase its earnings expectations despite operational challenges like labor and physician costs. They have the resources and ability to execute to move through these pressures and reach their goals. HCA is investing in digital health and AI initiatives, and they are optimistic about the potential for reduced compensation, expanded volume, and other opportunities.

Bill Rutherford discussed the investment in a new clinical system and how it could be used to move data sets to the cloud, improve care processes, and eliminate variation with the help of Artificial Intelligence. He also mentioned their positive outlook on the potential of AI and their partnerships with sophisticated companies to help them push through this. Lastly, he discussed how their outpatient growth was higher than expected and that the revenue per outpatient equivalent was down by 1%, which was weighed down by the strong inpatient pricing up 6%.

Bill Rutherford states that the commercial rate cycle is progressing consistently and that they are seeing mid-single digit level rates. He also states that they are currently north of 70% for contracts in 2024 and that they are continuing their efforts. Sam Hazen adds that the aggregate revenue growth was stronger in the second quarter than the first quarter and that they are continuing to get the targeted price increases in both their inpatient and outpatient businesses.

Bill Rutherford and Sam Hazen discuss how their relationships with managed care payers remain strong and that there is still friction when it comes to authorization and medical necessity reviews. They also mention that the slight raise in CapEx is due to growth opportunities in the market, as well as land acquisitions for future expansion in fast-growing markets.

Sam Hazen of Citi Group answered a question about labor efforts, mentioning that the company has invested heavily in their people agenda and that their recruiting efforts have yielded strong hiring. They are also seeing improved retention, with turnover approaching pre-pandemic levels, especially in the nursing area. Contract labor is expected to improve in the second half of the year, and the company is investing heavily in Galen College of Nursing, which is expanding into new markets.

Sam Hazen commented that the company has seen normal seasonal patterns in the first half of the year and expects that to continue through the second half. The third quarter is not as strong as the fourth quarter due to outpatient activity and deductibles. The fourth quarter is the strongest quarter of the year. He also mentioned that the company has maintained margins despite a difficult labor market and their labor costs are lower than they were in 2019.

HCA is 70% contracted for their targeted escalation objective for fiscal '24, and labor costs are moderating. However, there are still inflationary pressures and physician cost pressures that need to be accounted for when negotiating.

Bill Rutherford and Sam Hazen reported that there were no meaningful differences in the payer mix on the outpatient side, with adjusted admissions up 5% for both Medicare and managed care. Commercial outpatient revenue growth is outpacing Medicare outpatient revenue growth, with commercial revenue growth being driven by emergency room visits and surgeries. Frank Morgan concluded the call by thanking everyone for joining and offering to answer any additional questions.

The conference call has ended and all participants can now disconnect.

This summary was generated with AI and may contain some inaccuracies.