美國醫院公司 (HCA) 2013 Q2 法說會逐字稿

Welcome to the HCA second quarter 2013 earnings release 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 the Senior Vice President, Mr. Vic Campbell.

Please go ahead, sir.

Thank you very much, and goodmorning, everyone.

Mark Kimbrough, our Chief Investor Relations Officer, and I would like to welcome everyone on today's call, as well as those of you listening on our webcast.

With me here this morning, our Chairman and CEO, Richard Bracken; our President and CFO, Milt Johnson; and Sam Hazen, President of Operations, and then we have a number of other members of our senior management team here as well to assist during the Q&A.

Before I turn the call over to Richard, 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.

Many of these factors are listed in today's press release and in our various SEC filings.

Many of the factors that will determine the Company's future results are beyond the ability of the Company to control or predict.

In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements.

The Company undertakes no obligation to revise our update any forward-looking statements, whether as a result of new information or future events.

This morning's call is being recorded, and a replay will be available later today.

With that, let me turn the call over to Richard.

Okay, thank you, Vic, and thanks to everyone for joining our call.

Early this morning the Company reported its second quarter earnings results, which are in line with our preview of earnings release of July 16.

Summary information concerning our second quarter performance was provided in today's release, and I will offer more detailed review of the second quarter performance in just a moment.

But first I want to comment on the announcement we issued Monday afternoon.

In it we indicated that at the end of this year I'll retire from the role of CEO.

But more importantly that Milton Johnson, whom you all know as our President and Chief Financial Officer, will become CEO effective at that same time.

Let me just say that we are most fortunate to have Milton not only ready, willing and able to accept the responsible, but he will bring to the position a comprehensive understanding the industry and investor community, a long-term appreciate of HCA and our culture, and a competitive drive and ethical character to lead our organization into the future.

My congratulations in advance to Milton, and I look forward to supporting him and the entire management team through the Chairman's role.

Now a few general observations about the quarter.

In short, we were pleased with the results of the second quarter.

A modest increase in volumes, an increase in patient acuity and resultant revenues per visit, combined with an efficient cost structure, produced favorable results.

Revenues increased 4.2% and adjusted EBITDA increased 7.6% compared to the same period of the prior year.

Patient volumes for the second quarter as expressed in same facility admissions increased 1.3%, while same facility adjusted admissions increased 1.1%.

Generally, if we adjusted the first quarter volumes for the leap year effect, second quarter volume growth rates are similar to the first quarter.

More volumes in just a moment.

As a mentioned, we were able to achieve favorable earnings performance through a combination of improved service mix and, importantly, a significant improvement in our expense structure.

Same facility operating expense per equivalent admission increased 1.8% over the prior year second quarter.

As we discussed in the first quarter call, volumes began to slow in the second half of the first quarter, and when this trend was established, necessary steps were taken.

The benefit of these management actions continued through the second quarter and assisted in producing our favorable results.

Through the first half of 2013 our overall results are consistent with our internal plan.

As Sam will discuss in a moment, our most recent data indicates that our market share trends remain favorable.

We remain comfortable with our operating strategies and our significant focus on development on Service Line capacities and improvement of patient quality and service metrics.

Relative to our asset profile, we've had some developments worth noting.

Shortly after the end of the second quarter, we announced the signing of definitive agreement for the purchase of three hospitals in the Tampa/St.

Pete market.

This acquisition will add approximately 700 beds and approximately $225 million in annualized revenues to our Tampa market.

Furthermore, and within the last week, we have opened two newly constructed hospitals in the growing suburbs of existing markets.

One in Orlando, and one in Salt Lake City.

These new facilities that we are opening are smaller in comparison to our average hospital size and investment and will operate with an emphasis on outpatient services.

We have two additional hospitals using the same design concept now under construction in the Houston and Ft.

Worth markets.

Both are scheduled for complete in 2014.

We believe this approach will be a capital efficient way to stay aligned with population growth centers and provide access to our more comprehensive networks.

Also in the second quarter we announced the acquisition of The Outsource Group.

This is our first major acquisition for our Parallon enterprise.

We believe this acquisition will be complimentary to and augment the existing revenue cycle services provided by Parallon.

Parallon now will be able to offer a full spectrum of services ranging from targeted point solutions to end-to-end full service revenue outsourcing for hospitals and physician organizations.

A broader array of solutions will now be available for both Parallon and The Outsource Group's significant client base.

We welcome the new 1,400 new employees from The Outsource Group to our Parallon organization.

And finally, regarding healthcare reform, there are no major developments to report since our last quarter, although we did sign a few additional exchange contracts since our last call.

Now 90% of our hospitals are contracted with at least one exchange product, up from 85% as reported in the first quarter.

We don't expect any material impact on HCA from the delay in implementation of the employer mandate, and as most provider organizations, we are developing our strategies to participate in the exchange enrollment process for the uninsured.

And so with that, I'll turn the call over to Milton.

Thank you, and good morning to all.

Let me begin my comments this morning by thanking Richard for his leadership and countless contributions to HCA's success.

I'm looking forward to our continued relationship as you transition to Chairman next year.

I'm also grateful for our outstanding management teams across our markets and our corporate leadership team for their support.

I understand the unique role that HCA plays in the US healthcare delivery system.

I'm excited as well as humbled by the opportunity that lies ahead.

As CEO I will reinforce the mission and values of HCA, including our focus on improving patient experience and outcomes, while maintaining a culture of operational excellence and accountability for results.

Now let's move to a discussion of the second quarter.

I hope most of you have had a chance to review our second quartering earnings release issued this morning.

Sam and I will provide some additional information regarding the second quarter results, then we'll take your questions.

We were extremely pleased with the second quarter results, which were the product of solid volumes, better than expected revenue unit growth attributable to increase in acuity and excellent expense management by operating management teams.

As Richard mentioned, after the first six months of2013, we are right on plan for the year.

Of course, it hasn't been achieved exactly as expected, but after a difficult first quarter we are now back on quarter.

Revenues from the second quarter increased to $8.45 billion, up 4.2% compared to the prior year second quarter, driven by both volume increases and revenue per unit growth.

Adjusted EBITDA totaled $1.689 billion, compared to $1.569 billion in the second quarter of 2012.

Second quarter adjusted EBITDA margin was 20%, compared to 19.3% in the second quarter of 2012.

Net income attributable to HCA Holdings, Inc.

totaled $423 million or $0.91 per diluted share, compared to $391 million or $0.85 per diluted share in the second quarter of last year.

Second quarter volume trends were consistent with the first quarter after adjusting for the effect of leap year in the first quarter of 2012, with the same facility admissions increasing 1.3% and same facility equivalent admissions increasing 1.1% as compared to last year's second quarter.

Our same facility medical admissions increased 1.8%, while same facility surgical admissions declined 0.6% compared to prior year.

During the second year, same facility Medicare admissions and equivalent admissions increased 1.9% and 2.3% respectively.

Same facility Medicare missions both include traditional and managed Medicare.

Managed Medicare admissions increased 10% on a same facility basis and now represent 29.1% of our total Medicare admissions.

Sam facility Medicaid admissions increased 1.8% from the prior year, while same facility Medicaid equivalent admissions 2% compared to the prior year period.

Same facility managed care and other admissions declined 1.4% in the second quarter, while same facility managed care and other equivalent admissions declined 2% compared to the prior year second quarter.

In the second quarter uninsured admissions increased 6.3% on a same facility basis compared to the prior year.

Same facility uninsured admissions represents 8.1% of total admissions in the quarter, compared to 7.7% in last year's second quarter.

Same facility emergency room visits increased 0.8% in the quarter.

However, excluding the decline in pulmonary or flu related volumes in the quarter, ER visits would have increased 2.6% over the prior year.

Same facility surgeries increased 0.1% in the quarter, reflecting a 0.2% increase in our same facility inpatient surgeries, while our same facility outpatient surgeries with flat with the prior year.

During the quarter revenue for equivalent admissions increased 2.9% on a same facility basis.

This is partially due to an increase in our average length of stay and our case mix, a measure of inpatient acuity.

Average length of stay increased 0.7%, and the case mix index increased 1.6% compared to the prior year period.

For the second quarter, higher Medicare case mix index helped to mitigate the approximately $30 million impact of the BCA sequester, resulting in a decline of 0.2% in same facility Medicare revenue per equivalent admission.

Same facility Medicaid revenue per equivalent admission, excluding the Medicaid waiver programs, increased 6.3%.

Medicaid case mix index increased 2.8% over the prior period.

Managed care and other revenue per equivalent admission reflected solid growth at 6.1% over the prior year period.

Managed care and other case mix index increased 2% over last year.

Same facilities charity and uninsured discounts increased $461 million in the second quarter compared to the prior year.

During the quarter same facility charity care discounts totaled $796 million, an increase of $65 million from the prior year period, while same facility uninsured discounts totaled $2.014 billion, an increase of $396 million from the prior year period.

Now moving to expenses.

Expense management was excellent in the second quarter.

Same facility operating expense per equivalent admission increased just 1.8% compared to the prior year.

Excluding high tech and the Medicaid waiver program expenses, samefacility operating expense increase 2.6% in the second quarter of 2013 compared to the prior year period.

Salaries per equivalent admission increased 1.8% on a same facility basis, and same facility productivity performance as measured by man-hours per equivalent admission deteriorated 0.5% over the prior year period, and same facility wage rate growth was 1.5% in the second quarter.

Personnel costs associated physician employment increased $13 million or 4.9% from previous year's second quarter.

Non-cash share based compensation expense associated with the Company's management equity plan increased $14 million in the quarter over last year's second quarter.

Same facility supply expense per equivalent admission increase 2% from the prior year period, primarily reflecting a reclassification of non-equity member administrative fees from the reduction of supply expense to revenues.

The amount reclassified was approximately $37 million and contributed 260 basis points to the growth of supply expense per equivalent admission in the second quarter.

The reclassification had no impact on adjusted EBITDA for the quarter.

Same facility other operating expense per equivalent admission increased 1.6% from the prior year period.

We recognized $52 million in electronic health record incentive income in the second quarter, compared to $70 million in the second quarter last year, and this is consistent with our expectations.

The Company also incurred approximately $33 million and $20 million in [EHR] related expenses in the second quarter of 2013 and 2012 respectively.

Cash flows from operating activities totaled $814 million in the quarter, compared to $1.46 billion last year.

The $646 million decline was primarily due to a favorable benefit in 2012 from a decline in accounts receivable of approximately $390 million, which included the receipt of $271 million related to the 2012 first quarter Rural Floor Medicare settlement.

Also, we paid $245 million in additional income tax payments in the current quarter compared to the prior year period.

Days in accounting receivable second quarter increased by one day to 53 days, compared to 52 days at the end of the first quarter.

At June 30, 2013, the Company's debt to adjusted EBITDA ratio was 4.41times compared to 4.56 times at March 31, 2013.

Our exposure to floating rate debt is approximately 10% of our total debt.

At the end of the quarter we had $2.985 billion of borrowing capacity under a senior secured credit facilities.

Before turning the call over to Sam, I want to mention Parallon's implementation of both supply chain and revenue cycle services for LifePoint Hospitals is proceeding well and according to plan.

Now let me turn the call over to Sam.

Good morning.

I'll begin my comments this morning with more detail on the Company's volume trends for the quarter, and then provide an update on inpatient market share.

Eight out of 14 domestic divisions had growth in year-over-year same facility inpatient admissions.

Our international division also had growth in inpatient admissions.

Nine out of 14 domestic divisions and our international division had growth in same facility adjusted admissions.

Overall, the growth inside our portfolio of domestic hospitals was similar to the first quarter.

In the second quarter 60% of our domestic hospitals had growth in inpatient admissions, and 57% had growth in adjusted admissions.

As Milton indicated, emergency room visits were soft in comparison to past trends.

Only six out of 14 domestic divisions had growth in emergency room visits.

EMS transports to our hospitals were up almost 1%, with eight out of 14 divisions growing.

We have seen a general softness in the lower acuity emergency room business, and there has been some increased competition in a number of markets.

We feel these two factors are part of the reasons for the slower growth rates.

The Company continues to invest significantly in its Service Line to increase access and capacity, to improve operational efficiency, and to enhance quality and service.

All of this he with believe positions us well from a competitive standpoint in today's market and into the future.

Total surgeries for the Company were up slightly in the quarter, with hospital-based surgeries up 1.1% on a same facility basis, and our ambulatory surgery division down 2.3%.

This is a good improvement over the first quarter.

Inside our ambulatory surgery division, overall cases, which includes certain endoscopic and pain management procedures that are not counted in the surgery volumes, grew by 4% as a result of some recent acquisitions and new facility development.

As indicated, acuity this past quarter was strong.

Average length of stay in our adult and neonatal intensive care units was up 2.7%.

This continues a similar trend we experienced in the first quarter.

Behavioral services admissions was up 2.6%, and acute rehabilitation admissions were up 11.3% in the quarter.

These metrics are generally consistent with the first quarter.

And finally, deliveries were one point -- up 1%.

In the first quarter deliveries were down 1%.

Now let me transition to some market share highlights for the 12 months ending December 2012.

Once again, this is the most current data available for the Company, and it represents almost 90% of the Company's markets.

First, the Company's inpatient market share during 2012 increased 56 basis points to 23.7%.

Overall, inpatient demand in our markets increased in 2012 by 0.4%.

This is a slight weakening from 2011, which had market demand growth of 0.8%.

Inpatient demand, however, in the fourth quarter of 2012 was up 1.1%, reflecting a busy flu season.

Sequentially, market share increased in the fourth quarter as compared to the third quarter.

This follows sequential market share gains in each of the previous five quarters.

We gained market shares in 14 out of 17 Service Lines.

HCA had market share gains in 29 out of 37 markets, with growth in nine of our top ten earnings markets.

Market share in both the commercial and in migration segments of our business grew, reflecting continued success with our outreach efforts in these two distinct markets.

Across all of these market share metrics the Company's trends are generally consistent with past reports.

This pattern reflects solid execution of our growth agenda.

As you already heard, expense management in the second quarter was very strong.

Our management teams executed very effectively.

We will remain focused in the last half of the year on the same areas that we shared with you during our first quarter earnings call, and we believe these efforts should put us in a good position to maintain our cost structure in the last two quarters of the year.

With that, I'll turn the call back to Vic.

All right, thanks, SamNoah, I would like for to you come back on.

I encourage everyone, as we always do, to try to hold your questions to just one at a time so that everyone has an opportunity.

With that, Noah?

(Operator Instructions).

We'll take our first question from Justin Lake with JPMorgan.

Thanks, good morning.

First, congratulations to Milt.

Second, can you give us an update?

There's been a ton of news on public M&A recently, two deals announced.

But even outside that, wanted to get your thoughts on what the M&A pipeline looks like, and if you a chance to evaluate any of these deals and your thoughts on them?

Milt, you want to address that?

Sure.

I don't think we should address comments on the M&A activity in the public traded market right now, as thosetransactions are still ongoing and incomplete.

But overall, as Richard mentioned, we have signed some agreements to pursue acquisitions in our existing markets.

We like that approach to help round out in an existing market, improve position in markets.

We have transactions that are pending, subject to regulatory approval, in both Kansas City and as Richard mentioned this morning, in Tampa.

We're looking at other opportunities that would be similar.

Too early to tell if these will work out and lead to an agreement, but we are actively pursuing action decision and in the markets where it makes sense to us.

We think that's a strategy that we will continue and excited about the opportunities.

But as you well know, those opportunities for acquisitions tend to come and go in the marketplace at a certain pace, and we certainly are attuned to the market and looking forward to participating where it makes sense to us.

I'd just add -- this is Richard.

I would just add that we still think, given healthcare reform and over the longer view, that there will be consolidation in the industry.

We think our platform allows us to participate very efficiently in that process.

As we've said many times in the past, we are disciplined about where we acquire, how we acquire, and so that will be our thinking as we assess possibilities.

The pipeline, specifically to your question, is unpredictable.

It happens when it happens.

We generally are aware of most things that are going on in the marketplace and consider them.

But short of that, we're pleased with our efforts to date.

We add that to a strong position where there's organic growth in markets, and we think we have a pretty good growth story going forward.

Thank you, Justin.

Thanks.

We'll take our next question from Josh Raskin with Barclays.

Hi, thanks.

I was wondering if you could talk to the improved earnings from a geographic prospective, if any markets jumped out?

And maybe specifically comment on Las Vegas?

There's been some discussion that that's starting to see an improvement.

And I guess the last part of my first question is, in Vegas, if there's any thoughts around renewed discussions with the largest commercial payer there?

Sam, you want Vegas?

There was more than one question there.

Let me start with the geographic performance of the Company.

We had a very balanced performance across the organization.

We had many markets that performed better than planned.

So for the most part, the performance across the portfolio in general was very balanced, with most markets accomplishing what we had hope they would accomplish in the second quarter.

We had a few markets where there were some struggles, but they weren't material, and we were able to overcome those with the ones that performed well.

It's important to understand, for HCA, Las Vegas represents maybe 5% of the Company's earnings, and so from that standpoint, it's an important market, yes, but it's not a market that dictates the overall performance of the Company.

Having said that, Las Vegas performance last year and this year has been very strong for HCA.

We have seen reasonable market share gains over the time period.

I think in 2012, we picked up decent market share in Las Vegas.

And our financial performance has been solid, because of a very disciplined approach given the economic pressures that exist in that market and some of the underfunding that exist within the Medicaid program.

As it relates to the largest payer, asa routine, we do have discussions with them.

We haven't at this point in time reached any agreement that would reestablish relationships between HCA and Sierra inside of that market, but we do have ongoing discussions, given our long tenured relationship with them.

All right, Josh, thank you.

Thank you.

We'll take our next question from Tom Gallucci with Lazard Capital markets.

Thanks, good morning, and thanksfor all of the contributions, Richard, over the years, too.

In terms of reform, just curious if you have any updated thoughts.

I know you said nothing major changed in terms of exchange contracts, but updated thoughts on how you're thinking about the benefits as we look out, I guess either specifically or directionally in terms of ramp that you're thinking at this stage of the game, and when you might think that you're give us any more specifics about that topic?

Thanks, Tom, I think Milton is going to address that.

Sure.

As Richard said, it's really not a lot of change in our outlook since last quarter.

I'll maybe describe it this way.

What -- the uncertainty of the healthcare reform, there's two main drivers where we still have a great deal of uncertainty.

One, and to your question, what's going to be the ramp up or uptake on healthcare reform.

In other words, how many -- at what rate and how many of the uninsured will sign up for coverage in the exchanges?

That's a significant uncertainty for us.

Then second, of those that do come into the marketplace and go into the exchange, how many will we capture, what will be our market share in the exchange?

The payers which we have contracts with, how successful will those contracts be in capturing share?

Those are two main drivers of course of healthcare reform impact on HCA, and we need some more time to try to get some clarification of them around that impact.

And once we have that, I think we will factor that in.

And as far as timing, right now we want to keep flexibility with respect to the timing on when weplan to give from the healthcare reform impact, but right now I would say it would be no later we think when we give guidance for 2014, which is expected most likely to be in February of 2014.

Thank you, Tom.

We'll take our next question from Brian Zimmerman with Goldman Sachs.

Hi, thanks, and good morning.

To be able to hit our same store equivalent admission guidance, a number of 1% to 2%,you need a bit of a pick up in the back of the year to offset the weaker volumes we saw in Q1.

How confident are you that you're growing to be able to see that pick up in the back half of the year?

Milt, you want to address that as well?

Sure.

Good observation there.

Although we are still -- we're reaffirming our guidance, and as I said, we are on plan with respect to our EBITDA guidance, withrespect to the details of how we may arrive there, now that we're halfway through the year I think that it's more likely that our adjusted admission growth for the year will be somewhere around 1%, versus previously I think we had guided or given detail somewhere around 2%.

Here at halfway through the year we're up 0.3%,

And as I think about the overall revenue growth, I still think we'll be in that 3% to 5% -- 3% to 4.5%, 3% to 5% zone, as I stated before, because I expect our net revenue for adjusted admission growth rate will also be higher than we first thought.

We -- in May we said it would be 2% to 3% on our call.

Now I'm thinking more likely in 2.5% to 3.5% sort of growth rate, making up the shortfall from the change in outlook on our volume growth.

Year-to-date we're up 3.6% growth.

That excludes of course the 2012 Rural Floor settlement out of the first quarter of last year in that growth rate.

And then we still think our expenses for the year will come in that 3% to 3.5% zone.

In the first quarter our expense growth, excluding high tax expenses, grew 4.8% and we're up 2.6% here in the second quarter, and that averages out to about 3.7%.

So we still think our expense targets of 3% to 3.5% for the year are still reasonable tar gets.

So our revenue -- total top line revenue outlook is still the same, in that 3% to 5% zone.

Getting there, a little bit different mix between volume and revenue growth than we talked about in May.

All right, Milt, thanks.

Brian, thank you.

Good question.

We'll take our next question from Kevin Fischbeck with Bank of America.

Okay, great, thank you.

Just wanted to get a little bit more color on the exchange contracting.

I appreciate the color going to 90% from 95% (sic) with one contract.

But in the past you talked about the number of markets that have more than one contract, and going back to your point before about one of the unknowns being how much of the incremental coverage you'll capture within your facilities, whatis a good number of contracts to have in a given market as you think about it?

Is one going to be sufficient?

Is there a goal to get a certain number more than one in most more markets?

Kevin, I'm going ask Juan Vallarino.

I don't -- we really don't have the stats down, because the numbers didn't change a whole lot from the previous quarter when we walked through how many markets had contracts, whatever.

And we looked at that, and I would say no material change there, rather than 85% of the hospitals with a contract, we're at 90%.

But Juan Vallarino is not here in Nashville, but I think he's on an outside line.

Juan, you want to share anything that you can?

There's not a lot of specifics.

Sure.

Thank you.

Kevin, good question.

Obviously more contracts is better in any market.

I think the first year of the exchange you're not going know a whole lot until premiums get published from the health plans to knowthe plans that you do have business with, where they lie in terms with premiums compared to their competitors.

And to date only two of the states where we do business in have published premiums, and they're still both under review.

So we know very little today, as does anybody else, both on the payer side and the hospital side, about the potential grab of market share in the exchange.

So right now it's really a wait and see to try to get more contracts, but knowing that their premiums are set all ready, if that helps.

All right, Juan, thank you.

Kevin, thank you.

We'll take your next question from Chris Rigg with Susquehanna Financial Group.

Good morning, thanks for taking my question.

I just wanted to change gears a bit and find out what's the latest thinking on capital deployment?

Obviously there's some M&A and development going on, but just bigger picture, what you're thinking about doing with your cash for the balance of the year?

Thanks.

All right, Richard or Milt, one of you all want that one?

I wouldn't think that our position has changed from what we have shared with you in the past.

We take a look at our cash flow, obviously, and after our CapEx, I will say this, wedo see opportunities for perhaps increasing our CapEx some.

There are a lot of opportunities of growth within our markets, and we are evaluating those as we speak.

So I do think there is some opportunity for CapEx increases as we go forward.

We continue to obviously, as you mentioned, to rate strategic acquisitions at a very high priority use, and as we just mentioned, we've been doing that.

And then the other uses of cash are to be considered after those two, and I really don't see that lineup changing any time soon.

Thank you, Chris.

Thank you.

We'll take our next question from A.J. Rice with UBS.

Thanks.

Hi, everybody.

Richard, I want to wish you the best in the future.

Obviously, we have one more quarter, do that, and also congratulations to Milton.

Just to pick up on Milton's walk through the back half of the year.

Obviously, the two variables that have changed since your original guidance, seems like to me to the favorable, are the cost cutting effort you put in place in Q -- at the end of Q1.

I guess I'm curious whether that's fully reflected at this point in Q2, or where there be some residual benefits that go into Q3 that may make that walk forward seem a little conservative.

And then I guess you had the DSH proposal come out more favorable?

And I don't know what you think that will look like in the final role.

If you've got any insight, I guess we'll get that any day here.

But that -- those two would seem to suggest that [analysis] might have some upside to it.

Isthere any comment on that?

Let me do the DSH, then I'll let these guys talk about the cost cutting and how [it rolls].

Sam, you probably want to do that.

But, DSH, we know what you know.

We've seen the proposed rule, and we would expect a final rule very soon, within the next few days, but we know nothing more than that, and we'll wait until we see a final.

A.J., it's Sam.

I think the Company moved really timely in the first quarter of making adjustments once we sensed that volumes weren't where they were going to be.

And most of those efforts around adjustments to costs were accomplished in the first quarter and benefited the second quarter.

There were some residual efforts that occurred throughout the second part of the second quarter, if you will, that will have some incremental benefit as we move forward.

Again, our cost performance depends heavily on our volume, and as we achieve where we think our volumes are going to be, as Milton indicated, we believe the cost structure is in a pretty good position.

Having said that, we have a host of cost initiative as cross the Company that can produce some incremental value month in and month out, and they're centered around supply chain initiatives, ongoing sharing of best practice through our process improvement teams, clinical excellence initiatives that yield improvements in performance across the Company.

So those things continue to yield value and will bleed in as those initiatives get executed, but for the most part the substantial adjustments that we needed to make were accomplished in the first quarter, and we won't see the same kind of adjustments today that we had at that point in time.

All right, thank you, A.J.

We'll take our next question from Andrew Schenker with Morgan Stanley.

Thanks, good morning.

You guys mentioned your plan to participate in enrolling patients in exchanges and Medicaid.

Can you provide more details on your strategy around that?

Are you going to formalize it by being an assister or navigate?

And maybe just remind us just how successful you guys are generally today in enrolling people in Medicaid, and maybe the high risk pools?

Thanks.

Andrew, thank you.

Eric Ward, who is with Parallon.

Eric, you want to talk a little bit more about that?

Sure.

Today our process for enrolling patients in Medicaid is a combination of in-Company resources and vendor resources.

As we move forward into the future with the exchanges, we continue to think we're going use both resources from outsource prospective and insource prospective to enroll people in the exchanges.

We're working with our vendors today and are monitoring to see where we need to go in the future.

If I could add, we have a pretty successful of the component of conversion today.

We monitor our conversions on Medicaid very closely.

We benchmark against our vendors, and we think those lessons will apply as we move through exchange enrollment as well.

And Eric and his team have a very robust set of metrics and systems underneath all of those efforts that give us confidence that we can use those same approaches and hopefully get the same results as we move through the exchange.

The difference though is you get retroactive approvals on Medicaid.

We don't think we'll be able to get retroactive approvals on the exchange.

Let me just add, as -- this is Richard.

As we think about enrolling folks in the exchanges, there certainly is crossover with the skill set of the employees enrolling people in Medicaid as we speak.

And so as we roll forward, there's opportunities to be [what's that] a training organization.

We're certainly interested in that so that we can use existing employee resources when we insource to not only do Medicaid, but to do the exchange products or [to the HCA], and then also outsource where we need to supplement.

So we think we have a pretty good plan.

This is all developed -- this is in the process as we speak right now and really will unfold over the next [30 to 60 days].

All right.

Andrew, thank you.

We'll take your next question from Ralph Giacobbe with Credit Suisse.

Thanks, good morning.

Wanted to go back to the volume side of things.

Can you share any opinions you have on just the overall environment?

We've seen more pronounced volatility between certainly the public traded group over the last several quarters.

I guess you have any sense or take on kind of the urban versus rural characteristics, volatility between markets, and just general landscape?

And along those lines, it would be helpful to get your take on a long-term basis?

Just remind us what you -- what kind of same facility revenue growth you think you can achieve in the underlying EBITDA growth that would translate to, maybe ex reform?

Thanks.

Ralph, that was pretty good, one question became at least three.

I'm not sure we'll get to the last one any time on this call.

But you want to start out with just talking about volume, Sam?

Yes.

I think one thing -- and we've said this for year, and we still believe it's relevant to the discussion -- is that HCA has a unique portfolio of markets where it does business, and when you look at population trends, and you look at the economic performance of these markets, it's unique I think across the industry.

And that's part of why we believe we have maybe different volume metrics in some respects than others.

Having said that, we think our organic growth strategies are effective and yielding market share gains, as we've talked about with a pretty strong market share gain performance over the past few years, and so there's execution also that we believe is yielding some inherent growth.

Now, as it relates to the urban/rural, the only point of reference I can give you is that we monitor what we call the in-migration of business from the rural markets into these major metropolitan markets, and that segment of our business is the fastest growing segment of admissions activity on the inpatient side.

The composite growth in 2012 was actually 2.8%, and as I indicated for 2012, overall inpatient demand was only 0.4%, so you can see that at least in rural markets surrounding HCA's urban markets, there is a growing in-migration volume that's taking place, and that's why we're so focused on rural outreach and efforts to affiliate with rural providers, to drive growth for HCA.

I don't remember the other questions, Vic.

I think was the primary one, and Milton, I don't know if you want to talk ex reform, how we're looking at [these other] (inaudible -- multiple speakers) --

Well, just -- let me just -- maybe look at where we are year-to-date.

There's some moving parts to the numbers, so let me just kind of real quickly walk through and kind of get down to what we think is a normalized EBITDA growth, at least where we are for the first six months.

So on a reported basis all in, our EBITDA is down 4%, where this year we were at $3.257 billion for the first six months versus last year at $3.392 billion.

But of course last year we had the favorable Rural Floor settlement that was net $170 million in EBITDA.

If you back that out, then we're actually up 1.1% for the first six months.

And then if you consider high tech, the impact of our high-tech income and expenses impact on EBITDA, so we've got by less revenue of high tech, as you know, in the first six months this year, and we spent a little bit more on high tech expenses, rolling out the program this year.

The net effect on EBITDA is that this time last year, we had a drag -- I'm sorry, an impact of $88 million positive at this time last year because of the high tech revenue.

And this year we have a positive impact of $32 million into EBITDA.

So if you normalize, that we're at 3.3% up.

And so we're in that kind of low to mid single digit range, which is kind of where we expected when you normalize for these moving parts, high tech and the Medicare adjustment.

Good, Milt.

That's good.

Ralph, thank you.

Thanks.

We'll take our next question from Frank Morgan with RBC Capital Markets.

Good morning.

I'd like to go back to the commentary around your volumes.

A little bit of softness there.

Could you go back and explain a little bit about what you saw there?

I think he may have said increased competition for lower acuity services?

I just wanted to clarify on that.

And then any commentary on the geography of that trend in ER volumes, and does is mirroring overall hospital volumes?

Thank you.

All right.

Sam will take that, Frank.

We look at our ER business inside the different levels of acuity, and we've talked about some of the acuity levels in past calls.

And when we look at our business in, really, the first half of this year, but in particular the second quarter of 2013, we actually had a decline in the lower level -- lowest levels of acuity, and that was fairly broad based across the country.

But we did have slower rates of growth in the other levels of ER volumes, expect for our most acute component of ER business, where we actually had faster rates of growth there than we had in the first six months of last year, as a comparison.

When we look at the geography for our performance, we performed better in Florida, in East Florida and West Florida in particular on emergency room business.

We think the tourist business in Florida has been stronger this year than the past, and that's part of the explanation, but we do have a very robust emergency room growth plan across most of our markets, and that's yielding reasonable growth in other parts of the country.

For example, in California, last year we struggled with emergency room activity.

This year we're actually having a very strong level of performance in the emergency rooms in California.

There are increased competitors in both the urgent care space as well as the emergency room space in a lot of our markets, whether that's coming from hospitals or freestanding entities, and we think that is yield something pressure on the overall demand in this particular area.

Having said that, we're still very bullish on our emergency room strategy.

We believe there are opportunities to continue to differentiate in the market and gain market share and be a key part to access to the HCA system.

And we're investing in capacity in certain markets.

We're investing in different sites in certain markets.

We're adding program capabilities across the Company with trauma and stroke capabilities, which are important to other aspects of our business.

We reach out very effectively with our EMS partners and work to resolve their problems.

We've got a lot going on in this area, and we still believe it's going to be a very needed service across a lot of our markets, and we don't know if this is a trend yet.

It could be, but we think the aspects of this business will continue to yield solid growth, and wedon't want to take our eye off of the ball in this area.

Thank you, Frank.

Thank you.

We'll take our next question from Gary Lieberman with Wells Fargo.

Good morning, thanks for taking my question.

Maybe go back on some of the questions around volumes.

Is there any way to quantify the impact, if any, that new services or changes in Service Lines had on same store admissions?

Sam, you want to [slice a knife] at that [way]?

I'm not sure exactly, Gary, what specific certifications you're talking about.

I think that's such an ongoing effort with our facilities to gain accreditation where we meet certain quality standards and community standards.

And that does have an impact, and that's a very good process for us, because it forces discipline around performance and outcomes and so forth.

But given that that's happening on such a routine, I don't think it's incrementally changing the volume trends within the Company.

There are certain Service Lines where we add capacity, and we do it and add capability because we don't have that service in a particular market.

I'll use Nashville as an example.

Our network in Nashville is very solid, with geographical positioning and general capabilities, but a few years ago we felt that we did not have the full array of services to really accomplish what we wanted to accomplish as a network.

And we've added more substantial children services as an example.

We're just opening up a level two trauma program.

And that helps to round out the overall array of services in our market here in Nashville and makes us more competitive with respect to payers.

It also attracts higher capability from a specialty standpoint and really enhances our position in the community.

So those things are going on in multiple markets across the Company and are incrementally there, but I wouldn't say they substantially change the overall performance of the Company's volume metrics.

Gary, thank you.

I think we have got, Noah, time for one more question.

And we'll take our final question with Darren Lehrich with Deutsche Bank.

Thanks.

Congrats to Richard and Milt.

Thanks for squeeze me in here.

I wanted to ask just about the hospitals that you're opening.

You made the comment of just about the design, with a little bit more focus on outpatient, and a smaller inpatient footprint I guess is the implied comment there.

And maybe stepping back, if you could give us a sense with that might mean for your capital plan going forward in your existing hospital base?

Obviously, you've done a lot over time to configure your hospitals, but might we see a little bit of a different shift in how you're spending, and how does that play into CapEx over the next couple of years?

Okay, let me speak to the size of the hospitals, and then someone else can jump in here on the capital as we need to [build up].

This is Sam again.

These hospitals are in demographics in major metropolitan markets where there are opportunities to introduce an HCA facility and round out our network, as Richard mentioned.

We usually start out with 40 to 60 beds, inpatient beds, as an example.

And typically you will see a younger population in these markets, so they're not demanding as much inpatient healthcare as you might in a market where there's a different kind of demographic.

And so we'll start out with basic services on the outpatient areas, clearly emergency room capabilities, outpatient surgery, a lot of imaging.

And then we'll have a lot of women services in those facilities because they're connected to a younger popular, and our obstetric Service Line and so forth.

But what's important is that they now are connected to a larger network, and when there's a need for more sophisticated service, we can work with our physicians and our other hospitals to transfer patients to more [sophisticated] (inaudible -- technical difficulty) tertiary level hospitals and deliver the services that those folks need.

Then over time is grows.

We add beds.

We add services.

We bring in new physicians, and we start to get these certifications that we just spoke about, and we put ourselves in a position where it becomes a much more substantial hospital, and then move to different capabilities over time.

And that life cycle can vary.

It can be ten years in some cases.

It can be five in unique cases.

But it's typically a ten to 20 year cycle where these hospital will move into a much more sophisticated level.

But as it relates to these networks, they're very complimentary and very helpful to rounding out those capabilities.

And in addition to the two that Richard mentioned that are under construction, we're evaluated two to three other ones that we think make sense for us, and we will weave those into our capital plan as appropriate once we get through the due diligence on those analysis.

And I would just add that I wouldn't expect this to change the overall distribution of how we spend our capital.

We have had large projects come through the system in the past.

They take different forms as they work their way through, but for most part I wouldn't see this dramatically shifting the distribution of how we spend money in the Company.

We generally think of it as a facility percentage, a technology percentage.

And with the one exception, I would think that perhaps -- and as we mentioned on the Parallon acquisition, I know not particularly a CapEx comment, but we do see more opportunities around that space and Cap investment in that space where we haven't historically.

So I just think maybe that's where it might shift some, but not overall distribution.

And I'll just make this one comment and just wrap up.

We have a very good process and discipline around our capital allocation process.

Sam and Jon Foster and Chuck Hall, our operating teams are of course heavily involved in that.

And one thing that I think we have done very well over recent years is being able to match our capital of spending with capacity and growth opportunities.

And I think our process is very good around that.

It's flexible, maybe to your point, depending on market dynamics, and going forward I expect we'll continue to be very flexible and take advantage of the market opportunities.

All right.

Everyone -- thank everyone on the call.

I know Mark's here all day, and I'll be around, so give us a call if you need anything.

Have a great day.

This concludes today's conference.

Thank you for your participation.