HCA Healthcare, Inc. (NYSE:HCA) Q3 2023 Earnings Call Transcript

HCA Healthcare, Inc. (NYSE:HCA) Q3 2023 Earnings Call Transcript October 24, 2023

HCA Healthcare, Inc. misses on earnings expectations. Reported EPS is $3.91 EPS, expectations were $3.97.

Operator: Welcome to the HCA Healthcare Third Quarter 2023 Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir.

Frank Morgan: Good morning, and welcome to everyone on today’s call. With me this morning is our CEO, Sam Hazen; and CFO, Bill Rutherford. Sam and Bill will provide some prepared remarks, and then we will take questions. Before I turn the call over to Sam, let me remind everyone that should today’s call contain any forward-looking statements, they are based on management’s current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today’s press release and in our various SEC filings. On this morning’s call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure.

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A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare, Inc. is included in today’s release. This morning’s call is being recorded, and a replay of the call will be available later today. With that, I’ll now turn the call over to Sam.

Sam Hazen: All right, good morning. Thank you for joining the call. The business fundamentals for the company were solid in the quarter with broad-based volume growth on a same facility basis across our footprint and various service lines. These results reflected continued strong demand for our services and healthy operating margins on a same facility basis. Across most areas of our business, we maintained the operational momentum that we experienced over the past three quarters, including continued progress with our labor agenda. Unfortunately, our results were unfavorably impacted by our Valesco hospital-based physician venture. Bill will give additional detail on this impact in a moment. We are continuing our efforts to integrate this venture and anticipate implementing additional actions that should improve its operational results over the next few quarters, including less pressure for the company in the fourth quarter.

Because of this issue primarily, we have lowered the top side of our earnings guidance for the year to reflect the effects of these losses. It is important to understand that we believe the decision to consolidate Valesco was strategically imperative in maintaining the overall competitive positioning and capacity offerings of the company. As has been the case historically with our teams, I am confident that we will find a pathway forward to mitigate the impact it has had on our results. For the third quarter, diluted earnings per share were $3.91. Same facility admissions grew 3.4% year-over-year. Inpatient volumes were supported by continued strong acuity and a favorable payer mix with same facility commercial admissions growing an impressive 7%.

Same facility equivalent admissions increased 4.1%. This growth was driven by emergency room visits, which grew 3.5%. We are encouraged by our ER revitalization program and the results it is producing for our patients. Outpatient surgeries on a same facility basis grew approximately 1% year-over-year. Other outpatient categories also grew, including outpatient cardiology procedures, which increased almost 5%. These factors contributed to an increase in same facility revenue of 7.9% as compared to the prior year. In the quarter, we continue to invest significantly in our people with additional investments in orientation programs, Galen College of Nursing, and clinical education facilities. Turnover was stable in the quarter and nurse hiring was the strongest it has been all year.

These positive results help reduce contract labor costs 12.5% as compared to the third quarter last year and 11% sequentially. During the quarter we maintained available bed capacity. Instances where we could not accept patients from other hospitals represented only 0.9% of total admissions, which is consistent with the rate in the second quarter. We believe the significant investments we are making in our networks, our people, and our technology agenda will provide us with the necessary resources to improve our service offerings and deliver higher quality care to our patients with greater accessibility. I’m proud of our people for what they do every day to deliver on our purpose. I want to thank them for their dedication and their overall great work.

HCA Healthcare has a disciplined operating culture that we will maintain into the future. This focused approach, which benefits all stakeholders, enhances our ability to execute clinically, strategically and financially. So let me close with this. We look forward to our upcoming Investor Day on November 9th when we will provide more details about the company’s approach to driving sustained long-term growth and shareholder value. We will also provide some early perspectives on the upcoming year as well as longer-term thinking on growth targets. With that, I will turn the call to Bill for more details on the quarter’s results.

Bill Rutherford: Great. Thank you, Sam, and good morning everyone. I will provide some additional comments on our performance for the quarter. Consolidated net revenue increased 8.3% to $16.21 billion from $14.97 billion in the prior year period. This was driven by 4.5% growth in equivalent admission and 3.6% increase in revenue per equivalent admission. Same facility revenues grew 7.9%. As Sam mentioned in his comments, the Valesco joint venture had a negative impact of approximately $100 million on the company’s adjusted EBITDA in the quarter as well on a year-to-date basis. A portion of the third quarter results was due to revising our revenue estimates from the second quarter as we began to see claims being paid. This result was not what we were expecting, as we are experiencing revenue shortfalls compared to what we originally modeled.

The Valesco operating results had a negative impact on adjusted EBITDA margins of approximately 80 basis points in the quarter and 40 basis points on a year-to-date basis. Going forward, we anticipate the loss from this venture to approximate $50 million a quarter. We are working diligently on multiple efforts to address these results, including making programming adjustments where necessary, deploying efforts to reduce the cost structure, and working with payers for more appropriate reimbursement. As we have discussed previously, we have seen subsidy requests increase from contracted hospital-based providers. Professional fee expense for contracted providers have grown approximately 20% on a year-to-date basis, although we are encouraged the rate of growth of these payments slowed in the third quarter as compared to the second quarter.

In addition to the mitigation strategies discussed above, we continue to assess other operational adjustments within our cost resiliency programs to help offset some of the impact from these issues. Let me speak to some cash flow and capital allocation metrics. Our cash flow from operations was $2.48 billion in the quarter. Capital spending was $1.15 billion. We paid about $160 million of dividends and repurchased $1.14 billion of our stock during the quarter. Our debt-to-adjusted EBITDA leverage ratio remains near the low end of our stated range of 3x to 4x. As noted in our release this morning, we are updating our full year 2023 guidance as follows. We expect revenues to range between $63.5 billion and $64.5 billion. We expect net income attributable to HCA Healthcare to range between $4.94 billion and $5.13 billion.

We expect adjusted EBITDA to range between $12.3 and $12.6 billion, and diluted earnings per share to range between $17.80 and $18.50. We expect capital spending to approximate $4.7 billion for the year. Before we open it up for questions, I’d like to provide some commentary on our year-to-date performance. We believe our core business metrics remain solid. Year-to-date, our same facility emissions have grown 3.3%. Equivalent emissions have grown 5.1%. Non-COVID admissions have grown 7.5% over prior year on a year-to-date basis. Same facility ER visits have grown 5.7%. Inpatient surgeries have grown 2.3%, and outpatient surgeries are up 3.1%, all on a year-to-date basis. These volume metrics have outpaced our original expectations going into the year.

Our payer mix trends remain favorable. Same facility managed care admissions increasing 5.3%, and Medicare admissions increasing 4.3% on a year-to-date basis. Medicaid and uninsured admissions are slightly down from the prior year on a year-to-date basis. Our case mix index has held and increased slightly over prior year, and our same facility revenues have increased 6.4% on a year-to-date basis. Our same facility labor costs and supply costs are below prior year as a percentage of revenue. Through a focused and diligent effort, our operating teams have done an incredible job of addressing the contract labor pressures we had last year. On a year-to-date basis, our contract labor expense is down 18% or over 300 million from the prior year. We have confidence that a similar focused and diligent effort will help address the current physician cost pressures over time.

Lastly, when we look at our current adjusted EBITDA guidance for 2023, we think there are several notable items to consider. We discussed in our year-end call in January, COVID support payments, the out-of-period Texas waiver payment, and the 340B impact from 2022, which all totaled approximately $500 million. And when you consider the $145 million payer settlement we recorded in the first quarter of this year, as we take all of that into account, we are pleased with the growth rate we’ve been able to achieve. In addition, our diluted earnings per share, excluding losses on sale of facilities and losses on retirement of debt has grown 7.2% year-to-date. So I wanted to take a moment to put this quarter in some perspective. So with that, we look forward to your questions and I’ll turn the call over to Frank to open it up.

Frank Morgan: Thank you, Bill. As a reminder, please limit yourself to one question, so that we might get as many as possible in the queue, an opportunity to ask a question. Brianna, you may now give instructions to those who’d like to ask a question.

Operator: Thank you. [Operator Instructions]. Our first question comes from Kevin Fischbeck with Bank of America. Your line is open.

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Q&A Session

Kevin Fischbeck : Great, thanks. Maybe just want to build on that last point there. You know, the commentary about the year-to-date performance being strong is well taken, but I guess I get a lot of questions about whether there’s anything unusual, I guess, in the performance this year. I think people are trying to figure out whether this is a good base to think about future growth or whether there’s anything – whether it’s in the volumes or the rate or the payer mix that we really shouldn’t be expecting to continue. So I guess, is this a good base and should we think about normal growth off of this? Thanks.

Sam Hazen : Kevin, this is Sam. It’s our belief that demand for healthcare remains strong and will remain strong into the future. Just given the population trends that we see in our market, the aging of the baby boomers, as well as chronic conditions. I know though there’s been a lot of concern about GLP-1 and so forth. We think it’s way too early for any of that to have an impact on demand in the near term or even the intermediate term. And so from that standpoint, we’re really encouraged by what we see from a demand standpoint. Our overall competitive positioning, we believe continues to be strong. It’s indicated within our market share trends vis-a-vis where we were pre-pandemic, and so we’re encouraged by that. We continue to have resources we believe, to continue investing in our company appropriately, and positioning our agenda with the necessary resources to accomplish our objectives.

And so from our standpoint, economies remain strong across our portfolio, and we believe that supports some of the payer mix trends that we’ve seen. So we’re reasonably optimistic here that the overall top line metrics that you are seeing have durability.

Operator: Our next question comes from A.J. Rice with UBS. You’re line is open.

A.J. Rice: Hi, everybody. Obviously, as you went through, strong results, obviously the focus on this professional fee challenge. I know coming out of the second quarter, you were I think, thinking it would step down in Q3 and Q4. Now it sounds like if anything, it probably stepped up a little bit. I’m trying to understand, what was the variance in the quarter relative to previous expectations? Was it $50 million? It sounds like even in the quarter there’s some catch up from Q2. So maybe it’s a significantly bigger number as a negative. And then is the right way to think about Q4 and into next year, a $50 million quarterly run rate that you’re assuming discontinues, and therefore you’ve got to pick up in ‘24, one more $50 million adverse comparison. Hopefully that makes sense. And if I could squeeze in, just thinking about this quarter, the DPP payment from Florida, was that in line with what you thought or was that the net benefit a little better?

Bill Rutherford : Yes, A.J., this is Bill. Let me try to take those. So let’s talk about Valesco first and isolate that from our pro fees. I would tell you our professional fee expense on Valesco is coming in kind of what we expected. I mean as I said, our rate of growth in the third quarter slowed from the rate of growth from the second quarter, although we continue to see subsidy request and we’ve got efforts to mitigate those. There’s no doubt the issue for us in the quarter was the Valesco operations as I mentioned. We’re not clearing as much revenue than we anticipated. And I think it’s best you have to look at that on a year-to-date basis, because we did make some revisions as we started to see claims being paid in the third quarter.

And we believe, as I mentioned, it’s probably about a $50 million a quarter run rate for Valesco. We have a number of efforts underway to mitigate this that I spoke of as well. But in the short run, that’s what we’re sizing it at. You’re right, when you look at next year, we’ll have three quarters of it this year versus four next year. But we’ll give you more of our thinking when we talk about ‘24 later on, but you’ve sized it about right.

A.J. Rice: Anything on the Florida?

Bill Rutherford: The Florida DPP was slightly above what we expected, but we had other programs A.J. that were less than we expected. So you got to look at it in the overall context of the revenue mix of the company and I don’t think it’s that discreet, necessarily to just focus on one element of it, so. But it was slightly above.

A.J. Rice: Okay. All right. Thanks so much.

Operator: Our next question comes from Ben Hendrix with RBC Capital Markets. Your line is open.

Ben Hendrix : Thank you very much. Excluding Florida DPP from both quarters, EBITDA margin appears to have declined by about 180 basis points year-over-year, suggesting close to $300 million total headwind. If Valesco is $100 million of that, how would you characterize the remaining $200 million or so that brings us short of the 3Q 2022 margin? You mentioned the higher subsidy requests and maybe DPP in other quarters or in other regions other than Florida. But is there anything else to call out there that would weigh on margin? Thanks.

Bill Rutherford: Yes Ben, this is Bill. Isolate the margin, really that other operating line is where you see we’ve lost some margin for over the years [ph] reported quarter. Valesco was about 50 basis points of that when you adjust for Valesco. Kind of the pro-fee growth was about 40 basis points and the balance was really due to the increase of the supplemental expenses that we recorded in the quarter relative to Florida DPP and other programs. So the way I think about it, if you exclude Valesco, other operating was off about 120 basis points. 40 to 50 was the pro-fee effect and the balance was just the increase of the supplemental expenses that we recognized in the quarter. Labor was strong when I talked about a supply cost of strength. So it’s really isolated to those two issues, the Valesco and supplemental payments as much as anything.

Sam Hazen: I think, Bill, just to add a point to that, our same facility operating margins, which did include those elements Bill spoke to, were actually in line with our internal expectations. So I think from the standpoint of a little bit of pressure, we anticipated some pressure, but it was reflected again in the overall performance of our same facility. So most of this lands on the Valesco challenge with respect to the revenue and the earnings associated with that venture.

Ben Hendrix : Thank you.

Operator: Our next question is from Gary Taylor with T.D. Cowan. Your line is open.

Gary Taylor: Hey, good morning. One question and one clarification. Just on a clarification, I think we’ll see this in the queue, but I think professional fees were 22% of other OpEx in 1Q, 24% in the 2Q. Just wondering what that number was for the third quarter. It sounds like it may be slowed a little bit or didn’t change a lot. And then my real question really was about hitting into ‘24. I mean, we see a lot of volume strength. I mean, if we look at the stat comps, year-to-year admissions, adjusted admissions, ER, all accelerated pretty nicely. I’m just wondering how you’re thinking about carrying that volume strength into ‘24, and presumably the guidance you’ll give us in a few weeks at Investor Day.

Sam Hazen: Well Gary, this is Sam, and Bill can jump in here. We believe again that our core business, our hospital-centric core business is performing well. I mean, our volumes were broad-based. Every division in our company had admission growth, had adjusted admission growth. Every service category in our business offerings had growth except for OB. Our obstetrics volumes, mainly births were down slightly, pediatric was down slightly, and our behavioral was down because we made some capacity adjustments, and not because demand is shrinking in behavioral. Just because we needed capacity that we felt might be more productive. So across geography and across service lines, really solid performance. On the labor front, we were investing in the quarter in our labor agenda at the same time as making improvements.