美國醫院公司 (HCA) 2014 Q2 法說會逐字稿

>> Operator Welcome to the HCA second quarter 2014 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 Senior Vice President, Mr. Vic Campbell.

Please go ahead, sir.

All right, Travis, thank you.

Good morning, everyone.

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

With me here this morning, as usual, our President and CEO Milton Johnson; CFO and Executive VP Bill Rutherford; and Sam Hazen, President of Operations.

And then we have several other members of the Senior Management team with us as well to assist during the Q&A.

Before I turn the call over to Milton, let me remind everyone that should today's call contain any forward-looking statements, they're based on Management's current expectations.

Numerous risks and 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 or update any forward-looking statements, whether as a result of new information or future events.

And this call is being recorded and a replay will be available later today.

With that, I'll turn the call over to Milton Johnson.

Thanks, Vic, and good morning to each of you joining our call.

We hope you've had a chance to review our second quarter 2014 earnings release we issued this morning.

I will cover a few highlights, then I will turn the call over to Bill Rutherford and Sam Hazen.

This morning's second quarter release is consistent with our July 16 preview of the second quarter's results.

We are very pleased with the results and saw a continuation, and in many cases improvement, in trends from recent quarters.

Volume trends were solid.

Expense management was excellent and improving payer mix and increasing acuity continue to drive high revenue per equivalent emission.

Results for the quarter exceeded our own internal expectations, with our core operations driving much of the upside to the quarter.

As a result we are raising our full-year 2014 adjusted EBITDA guidance to a range of $7 billion to $7.15 billion.

In our second quarter of health care reform, we experienced continued growth in exchange and Medicaid volume, with fairly noticeable reductions in our uninsured volume.

Generally in the second quarter of 2014 core operations contributed approximately two-thirds of our adjusted EBITDA growth and health care reform contributed approximately one-third.

Bill will provide more detail on health care reform in a moment.

However, it's noted in our revised guidance, we now believe health care reform will comprise 2% to 3% of our 2014 adjusted EBITDA growth, up from 1% to 2% in our earlier guidance.

Although there remain many uncertainties, based on the results from the second quarter, we are forecasting more favorable trends than we had originally.

We believe we are well positioned to succeed in the health care reform marketplace.

As a management team we remain confident in our key operating strategies to deliver leading quality and services, drive growth through distinctive physician and patient relationships, improve the efficiency of our service delivery, develop a well-informed response to an evolving market environment, and to be a preferred place for work for all of our employees.

Moving to the quarter, revenues increased 9.2% to $9.23 billion over last year's second quarter.

Adjusted EBITDA totaled $2 billion in the quarter, an increase of 18.5%.

This includes the $142 million increase in Texas Medicaid waiver revenues recognized during the quarter.

Normalizing for this, adjusted EBITDA increased approximately 10% over the prior year's second quarter.

Excluding electronic health record incentive income, share based comps, and the additional Texas Medicaid waiver revenues recognized in the second quarter, adjusted EBITDA increased 12% over the prior year and year-to-date is 9.2% greater than the prior year.

Net income attributable to HCA Holdings total $483 million.

Net income before gains on sales of facilities and losses on retirement of debt was $619 million, or $1.37 per diluted share, compared to $0.91 in last year's second quarter.

Diluted shares for the quarter were $453 million, down from the $463 million in 2013.

During the quarter we repurchased $750 million of our stock, or 14.555 million shares at a net offering price of $51.53 per share.

And during the past nine months we have repurchased $1.25 billion of our stock.

A significant highlight of the second quarter was cash flow generation.

In the second quarter cash flow from operating activities totaled $1.25 billion, up $436 million over the second quarter of last year, a 53.6% increase.

Free cash flow was $627 million in the quarter.

Free cash flow in the quarter was approximately 84% of the $750 million share repurchase completed in the quarter.

Our managed care contracting team is highly focused on our 2015 exchange contracting strategy.

We are in discussions with all the major health plans regarding their expansion markets or new products in existing exchange markets.

Our 2015 exchange contracting is proceeding well.

For example, today we are pleased to announce we have finalized exchange contracts with United Healthcare for all of our Texas markets.

Also, Blue Cross Blue Shield of Texas added our Houston, San Antonio, and El Paso facilities to their existing networks since the first quarter of this year.

I want to take a moment to commend our Chief Medical Officer and Clinical Services Group President, Dr. John Perlin, for the service he is presently providing as a senior advisor to the acting VA Secretary.

Effective July 15, 2014, John has been on a 60-day leave of absence from his HCA duties.

As I said, when John's temporary employment was announced publicly, HCA has a long tradition of support for America's service members, their families and for our nation's veterans, and we are proud that he can assist the VA during this challenging time.

We are very supportive of his willingness to do this for the VA and confident that his efforts will lead to continued improvement in access to care for our nation's veterans.

HCA is fortunate to have the strong leadership of Dr. Tom Garthwaite, Dr. Perlin's Chief Operating Officer in our clinical services group, to step up and lead CSG in John's absence.

Also want to congratulate Chris Taylor, our new President of Parallon.

As many of you know, Chris had been with HCA for many years and has 30 years of experience in the health care business, most recently as Parallon's CFO.

He has been serving as interim President there and has done a fabulous job leading that organization.

Chris will continue to report to Bill Rutherford, and we look forward to seeing great things in the future from Chris and his team.

With that, I'll turn the call over to Bill.

Thanks, Milton, and good morning, everybody.

I will cover some additional detail around the second quarter results, health reform, and our 2014 guidance.

As Milton stated earlier, we were very pleased with the quarter's results.

The second quarter results were due to continued strong performance in our core business and increasing impact from health reform.

Within the core business we have seen strengthening volumes, increased intensity of services, and very good expense management.

For the quarter, adjusted EBITDA increased to $2 billion from $1.689 billion last year, which was also a very good quarter.

The second quarter of 2014 includes $142 million adjustment related to the Texas Medicaid waiver program, which we received in the quarter, which as we mention in the release relates to receipts of reimbursements in excess of our estimates for the indigent care component of this program for the year ended September 30, 2013.

In the second quarter our same-facility total admissions increased 1.2% over the prior year and equivalent admissions increased 2.2%.

We experienced a 70-basis point reduction in our admissions in the quarter due to declines in one-day stays.

Adjusting for one-day stays, same-facility admissions would have increased 1.9%.

During the second quarter, same-facility Medicare admissions and equivalent admissions increased 1.6% and 2.3% respectively.

Medicare admissions include both traditional and managed Medicare.

Managed Medicare admissions increased 5.7% on a same-facility basis and represented 30.2% of our total Medicare admissions.

Same-facility Medicaid admissions and equivalent admissions increased 7.8% and 8.8% respectively in the quarter.

This compares to increases of 1.4% and 2.4% respectively in the first quarter of this year.

This was driven by continued growth in our four Medicaid expansion states as well as growth in a number of our non-expansion states as well.

I will provide some additional commentary on Medicaid expansion in my health reform remarks.

Same-facility self-pay and charity admissions declined 14.7% in the quarter, while equivalent admissions declined 4.9%.

Self-pay and charity admissions represent 6.8% of our total admissions, compared to 8.1% last year's.

These results continue to trend favorably to our recent history.

Managed care and exchange admissions increased 1.6% and equivalent admissions increased 2.5% on a same-facility basis in the quarter.

Same-facility emergency room visits increased 5.7% in the quarter compared to the prior year.

This represents the highest rate of growth in our ERs in five quarters.

Same-facility self-pay and charity ER visits represent 20.7% of our total, compared to 23.4% in last year's second quarter.

Consistent with recent trends, intensity of service continued to increase with our same-facility case mix, increasing 1.7% over the prior year.

Same-facility surgical volume contributed as inpatient surgeries increased 1%, while outpatient surgeries declined 0.3%.

This helped to drive stronger revenue intensity.

Same-facility revenue per equivalent admissions in the quarter increased 5.4%, or 3.5% if you exclude the Texas Medicaid revenues recorded in the quarter.

Same-facility managed care and exchange revenue per equivalent admission increased 2.9% in the quarter.

Case mix increased 2.8%.

Same-facility charity care and uninsured discounts increased $193 million in the second quarter compared to the prior year.

Same-facility charity care discounts totaled $894 million in the quarter, or an increase of $98 million over the prior year, while same-facility uninsured discounts totaled $2.112 billion, an increase of $95 million from last year's second quarter.

Now turning to expenses.

Expense management in the quarter was very good, as we were able to leverage the intensity of services along with increased volume.

As reported, our adjusted EBITDA margins for the second quarter increased 170 basis points, from 20.0% to 21.7%.

Adjusted for the $142 million Texas Medicaid item, high-tech revenue, and share-based compensation, adjusted EBITDA margins increased 80 basis points from 19.7% to 20.5%.

Same-facility operating expense per equivalent admission increased 2.3% over the prior year.

As noted in our income statement this morning, salaries and benefits as a percentage of revenue improved by 110 basis points to 44.4%, compared to 45.5% last year.

Salaries per equivalent admission increased 2.4% on a same-facility basis.

Same-facility supply expense per equivalent admission increased 1.1% in the quarter compared to the prior year.

And other operating expenses were flat with the prior year at 17.8% of revenues.

We did recognize $35 million in electronic health record income in the quarter, compared to $52 million last year, which was consistent with our expectations.

We also incurred about $32 million in EHR-related expense in the quarter compared to $33 million last year.

I'll briefly touch on cash flows.

We had a really strong cash quarter, as cash flows from operations increased to $1.25 billion from $814 million in last year's second quarter.

In addition to growth in core operations and related net income, cash flow was favorably impacted by Texas Medicaid waiver payment and improved working capital.

At June 30, the Company's ratio of debt to adjusted EBITDA was 4.16 times, compared to 4.32 times as of December of 2013.

At the end of the quarter the Company had approximately $1.662 billion available under its revolving credit facilities.

So now let me spend a few minutes on health reform.

First, we saw just under 5,500 exchange admissions for this quarter and just over 19,000 exchange emergency room visits.

The progression we saw in the first quarter continued into April, with about 1,300 admissions in April, 2,000 in May, and 2,200 in June.

So the month-over-month growth did taper off towards the end of the quarter.

Based on our look back at accounts previously seen, we now believe about 40% of our health exchange volume was newly insured.

We get asked about the acuity or intensity of this exchange volume, and using case mix as the measure for intensity, our case mix for exchange patients is about 10% higher than our managed care book of business.

We attribute the majority of this to lower OB volume in exchange as a percent of total, versus the OB volume in our commercial line of business.

We are collecting our exchange volumes at rates similar to our commercial reimbursement.

We continue to see favorable mix trends in our four states that initially expanded Medicaid.

New Hampshire is now our fifth state that recently expanded coverage as well.

Giving timing of pending Medicaid conversions, we believe it's relevant to look at trends on a year-to-date basis.

On a year-to-date basis, we have seen a 32% increase in Medicaid admissions and a corresponding 48% decline in uninsured admissions year-to-date in our four expansion states.

It is interesting to note that uninsured volume from non-expansion states has also declined just under 2% on a year-to-date basis, resulting in a total year-over-year decline in uninsured admissions for all states of 6.6% year-to-date as of June 30.

Although uncertainty still remains for the balance of the year around utilization rates, potential impact of nonpayment of premiums and other factors, we remain optimistic on the long-term benefits of health reform and accordingly have revised our full-year health reform benefit from 1% to 2% of adjusted EBITDA to 2% to 3% of adjusted EBITDA for full-year 2014.

So now let me turn to our revised guidance for 2014.

As you read in the release, based upon the strong performance in core operations and our improved health reform outlook, we have revised our 2014 guidance as follows: we estimate net revenue to be between $36 billion and $36.5 billion versus our original guidance of $35.5 billion to $36.5 billion.

We estimate adjusted EBITDA to be between $7 billion and $7.15 billion.

This is an increase from our original guidance of EBITDA between $6.6 billion and $6.85 billion.

EPS is estimated to be between $4 and $4.25, up from our original 2014 guidance of $3.45 to $3.75.

This does take into account our recently completed share repurchase and our bond refinancing completed earlier in the quarter.

Capital spending guidance remains at $2.2 billion.

So that concludes my comments and I'll turn it over to Sam for additional commentary on the quarter.

Good morning.

I'll begin my comments this morning with more detail on same-facilities volume for the quarter, and then provide a quick update on market share trends for the Company.

As mentioned earlier, our volumes improved in the quarter.

This improvement was broad-based across most of the Company's markets, and we believe it reflects a combination of solid execution of our growth agenda by our operating teams, improving macroeconomic trends in many of our markets, and capital spending that has been deployed both to increase access to our networks and to add operational capacity.

For the quarter, nine of our 14 domestic divisions had growth in admissions.

Two were essentially flat and three were down.

Nine of 14 divisions had growth in managed care and exchange admissions.

Three were essentially flat and two were down.

11 of our domestic divisions had growth in adjusted admissions.

Of the remaining three divisions, one was flat.

All but two divisions had growth in managed care and exchange adjusted admissions.

13 out of 14 divisions had growth in emergency room business, and all divisions had growth in managed care and exchange emergency room visits.

Growth in inpatient surgery volumes was generally consistent across our divisions.

All but four divisions were up for the quarter.

Orthopedics, cardiovascular, and neuroscience service lines had solid growth.

Hospital-based outpatient surgeries were up slightly, while surgeries in our ambulatory surgery division were down 1%.

Deliveries for the quarter grew 2.2%, which is consistent with the first quarter's growth.

However, managed care and exchange deliveries grew 7.3%, which is an improvement in the rate of growth as compared to the first quarter.

These trends were generally consistent across most divisions.

Neonatal admissions grew 9.3% in the quarter, behavioral service admissions grew 6.5%, and rehabilitation services grew 10.5%.

And finally, average length of stay increased 1.9%, which reflects the increased acuity that was mentioned previously.

Now let me transition to some market share highlights for the 12 months ended December 2013.

Once again, this information is the most current information available and represents approximately 90% of the Company's markets.

Inpatient market share for the Company grew 17 basis points to 24.1%.

The Company gained share in 13 of 18 service lines.

We gained share in 54% of our markets with growth in eight of our top ten earning markets.

Market share in the commercial segment improved modestly, and then during this period overall market demand at HCA's markets declined 45 basis points, reflecting the effects of leap year and a softer flu season in the fourth quarter.

HCA has a comprehensive growth agenda and we continue to invest in it with capital, people, technology, and best practices.

As a result, we believe our local networks are positioned well to continue in competing effectively in their respective markets and delivering high quality care.

And with that I'll turn the call back to Vic.

All right.

Thanks, gentlemen.

Travis, if you'd come back on and we'll go ahead and start the Q&A.

I do ask, as always, that you limit your questions to one.

If you've got a second one, please queue back up for it.

Travis?

(Operator Instructions)

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

Good morning.

Just some numbers questions here.

Can you give us some color on geographic disparity in terms of volume growth?

What you saw going through the quarter?

And then I apologize if I missed it, but uninsured volumes, can you tell us what they did and specifically, maybe break out Medicaid opt-in stage versus those that bid in?

Thanks.

All right.

Sam, do you want to sort of do the general geographics up, and then Bill, you pick up the second half?

The fact that most of our divisions had volume growth speaks to the geographic dispersion of our performance and the fact that it was fairly consistent across the Company.

I'm trying to think how to say it any different than I've already said it, Justin.

If you look inside the divisions, the one market where we've had some difficulties, actually we had two markets where we had a little bit of difficulties, inside of certain divisions from an admissions standpoint, and that was DFW and Denver.

And we have specific explanations as to what's going on there and we feel like we are in pretty good shape with our response.

But when you look across the state in total, though, we had solid performance in Florida, we had solid performance in Nevada, we had solid performance in most of our Texas markets, in California.

So, we had really broad-based overall performance on most of our volume metrics, which is encouraging and again, I think it reflects the factors that I mentioned on the call.

Uninsured admissions for the quarter were down 14.7% and year-to-date were down 6.6% for the Company.

If I look at just the expansion states, and we look at really a year-to-date trend, year-to-date Medicaid volume in those expansion states is up 32%, and our uninsured volume in those expansion states are down 48%.

Great.

I think I had just the last numbers question I had asked was around the trajectory of the quarter?

We were hearing maybe some pick up in May and June versus April.

Can you give us some color on volumes as you went through the quarter, and if you want to throw July in there, I'd love to hear that as well?

(Laughter) Justin, nice try.

You know us better than that.

And actually, we don't do much on the monthly trends.

We did do a little bit on the --

Well we had some calendar differences across the quarter.

We had more business days in the month of June than we did last year, so June was naturally higher as a result of the calendar effects.

But if you normalize for that, we had fairly consistent performance across each of the months in the quarter.

Thanks.

Josh Raskin, Barclays.

Thanks.

Good morning.

I guess my question relates to exchanges in sort of your networking strategy.

And so, as I think about the impact, I know you guys gave great color, I think you said 2,200 admits from exchanges in June.

Is it fair to say that would sort of be seasonally adjusted towards the higher end and you wouldn't expect much more exchange membership coming through?

And then, as you think about 2015, do you expect a real increase in your presence from an exchange perspective, or any other sort of big changes in your networking strategy for next year?

Josh, this is Bill.

I'll take the first part of the question.

As we went through the first quarter we talked about the progression, it doubled in each month.

We saw that continue into the early part of April, though we purposely wanted to give you that monthly one, because it is starting to month over month taper off.

Part of the uncertainty of where will that go for the balance of the year and what will be that trend line, I think it's fair in our projections that we project that to slow.

And in terms of its month-over-month growth, unclear if it hit its high watermark yet.

But in our outlook for health reform we are looking to taper that off, at least for the balance of the year.

I need to speak to the managed care strategy, exchange strategy.

Again, I think what our first year, we're very pleased with the results so far of our strategy for 2014.

So I mentioned in my comments, we definitely will be expanding with United in the state of Texas, with Blue Cross Blue Shield of Texas also, some expansion of exchange networks there.

I think, as I said, we are in discussions with all the major plans regarding exchange contracting for 2015.

So, I think you'll continue to see our contracts and our networks evolve over time as we watch the marketplace.

I don't see it as a static, I see it as something that we'll be looking at on a continuous basis and hopefully being able to improve our position, which I think today is already well positioned.

Josh, thank you.

Darren Lehrich, Deutsche Bank.

Thanks.

Good morning, everybody.

So, I wanted to touch on the acuity topic.

You gave us a sense for the acuity levels in your exchanges in terms of what you're seeing.

I'd really be interested in getting some commentary from you about the overall trend in acuity and anything that might look different to you in the environment.

Or is this more a function of your service line development?

Well, we've said over time we expect the acuity of our inpatient business to grow simply because there are technologies in other venues for certain lower acuity business that can be moved into the outpatient arena and so forth.

From that standpoint, there's going to be a natural increase we believe in our acuity metrics, which is the case mix index.

Having said that, the Company is very intentional about developing more capabilities inside of our service lines, deepening the capability with more tertiary and quaternary level capabilities, and that effort continues to evolve.

We continue to invest in that in a very significant way with physician strategy, with facility investment, and technology investment.

So that is an ongoing piece of our business and drives our case mix also.

The trends that you saw in the quarter are fairly consistent with what we've seen in the past few quarters, and we're generally in line with our internal expectations on our case mix index.

Okay.

Thank you.

Frank Morgan, RBC Capital Markets.

Good morning.

I was interested in the Texas market, specifically a non-expansion state.

I was curious what you have seen, any additional commentary you can give us on how volume trends have developed there?

Do you feel that it's heavily subsidized public exchange enrollment is really helping drive growth in that market, even though that's a state that didn't expand Medicaid?

And then as a follow-up, any specific strategies that you might want to call out that are helping drive volume growth other than just HCA or the economy?

Thank you.

Bill, you may have the number on Texas, and then Sam, maybe want to talk about strategy?

Yes.

Texas showed great growth during the quarter, a couple points, which was higher than the Company average.

We are seeing Medicaid growth in Texas, which is in line with what the Company averaged, as you mentioned, in line with the enrollment.

And a decent amount of exchange volume as well throughout the state of Texas.

Sam, strategies?

Nothing materially changed in our growth agenda.

We've been very consistent in how we've designed our growth agenda within each of our local markets.

I mean, it centers around creating sufficient and adequate access to our facilities, creating, as I've said previously, a comprehensive array of service lines.

And then being very intentional about physician engagement strategies and responding to physician community in a very substantial way.

Those components are getting resourced at a very high level.

We've increased our capital spending, as you've heard before.

We've increased organizational talent within the Company to support these initiatives, and we're building it on a platform that we believe is very competitive around how we develop quality initiatives, patient satisfaction initiatives, efficiency initiatives, and so forth.

So the combination of that is consistent and being executed, we think, very, very effectively.

We are actually in the process of doing mid-year reviews, which is something we do routinely, and we will continue to evaluate and determine what adjustments, if any, are needed in our individual local market strategies.

Thank you, Frank.

Brian Zimmerman, Goldman Sachs.

Hi.

Thanks and good morning.

I know it's early on, but there's been a lot of discussion in DC in the last couple of days around the ability of VA patients to seek care outside of the traditional VA system.

I'm just curious what your thoughts are on this potential opportunity?

Brian, I'll take that.

It appears, as of yesterday, I think most of you are aware of the press conference that was held, that it appears that they have come to a compromise.

The conferees have come together.

We're hopeful that maybe before they leave on their August recess they will pass a piece of legislation.

I think they're talking about a bill that's around $12 billion.

The good news is we're not being asked to pay for it.

The largest portion of it's emergency funding.

So we think it's good.

It's good for veterans.

Exactly how it will play out, what the opportunities will be for private care, yet to be seen.

As we've told you the past, we are well positioned in a number of cities and some states where there is a good veteran population.

So we're there to serve.

We've got some contracts now and we would anticipate that we will be participating to some degree once it passes.

Thank you.

Ralph Giacobbe, Credit Suisse.

Can you maybe talk a little bit about your managed care book, what rates you're capturing, how much you've negotiated for next year?

And if you're seeing any changes from payers in your markets, whether it's tighter networks are pushing you to take risk, and whether that played into some of your increased discussions with them in terms of getting more in network?

Thanks.

Sam, do you want that or do you want Juan to pick up here?

Let me start and then, Juan, you fill in the gaps here.

At this particular point in time, for 2015 we have approximately three-fourths of our overall commercial book negotiated and contracted at consistent terms, consistent pricing, and a consistent network configuration.

So we haven't seen any substantial change in our core commercial book.

As it relates to evolving strategies with payers, we're always interested in working with our payer partners on developing approaches that make sense for them and make sense for us.

But outside of the exchanges, we're not seeing any significant changes in the overall configuration of our managed care contracts.

We are actually about 40% contracted for 2016.

That, too, is very consistent with past practices and even 2015's strategies.

With any exchanges, as Milton said, we continue to evolve and we think there are opportunities in certain markets where different network configurations may make sense for us.

And as we look today, we probably have about 60% access to all the contracts inside the exchanges within our markets.

My estimation is that we'll grow some with the United announcement and some of the other payer announcements.

And so we are looking to expand that in an appropriate way.

And as we study and learn more about how the exchange business is developing within each of our markets, we will be able to adjust that strategy appropriately.

I don't think there's much to add there.

(laughter) Thank you.

Thank you, Ralph.

Whit Mayo, Robert Baird & Company.

Bill, for the Texas Medicaid waiver plan, how much of the $142 million was in-period versus out of period?

And also, can we get an idea of what an annual expectation is for that program going forward?

I know there are some moving pieces.

Then also, I'm just kind of curious why there wasn't an accrual made for that within the first quarter.

Thanks, Whit.

Let me give you a little bit of commentary on that.

As you know, we're in the third year of a five-year waiver program for Texas.

The second year ended September 30, 2013.

The payments we received under the waiver program are funded by these intergovernmental transfers from taxing districts and other district hospitals.

And the IGT amounts to fund any waiver payment can vary based on several different variables that we don't always have visibility into.

We did have an accrual on the books, but the amounts that we received were in excess of the amounts that we had accrued for, and it did relate for the year end September 30, 2013, so we view that as a one-time adjustment.

We have current accruals that we recognize that are reflective of what we think our best estimate is based on the current payment schedule.

Okay.

Thanks.

A.J. Rice, UBS.

Hi, everybody.

I just thought I might ask, obviously a lot of this is probably being driven by the top line, but you're showing margin improvement, particularly if you ex out high-tech year to year.

I wondered would you see it on the cost side as strictly leveraging the good top line performance that you're highlighting?

Or are there some things going on on the cost side that would be worth highlighting?

I know you anniversaried your big cost cutting program from a year ago, and yet still seem to show good margin improvement here.

I'm curious about that, any cost initiatives worth highlighting?

I think clearly the leverage, the operating leverage of the Company, was showcased this quarter with significant margin expansion, given the revenue that we had.

So our clearance on that incremental revenue was very positive, A.J.

Underneath that, though, I'm proud of what our operating teams are doing to drive efficiencies, recognizing that that's just a core responsibility of our teams, We have numerous agendas, as I've mentioned before, where I think we're continuing to find opportunities in our supply chain.

We continue to find opportunities, for example we're expanding aspects of our supply chain into pharmaceutical distribution and pharmaceutical warehousing where we think we can gain a better control over our drug inventory and our drug distribution within our systems.

That frees up our pharmacy managers to work with our physicians on better formulary management and so forth.

On our clinical excellence agenda where we are moving on certain service lines to improve the performance of the service line, we are finding opportunities to create clinical processes that are more efficient, more effective for our patients, and at the same time producing cost results.

I think we've gotten smarter about a couple of other agenda items inside the Company and that's helped us manage the cost trends.

In particular, that's with our physician strategy where we've been able to come up with some creative ways to accomplish our physician initiatives and our overall engagement there.

And the combination of all that has been powerful.

Obviously on labor, labor management is a day-to-day thing.

Our teams are incredibly well equipped and capable at executing on that.

You saw very effective deployment of different elements of our labor management strategies to drive margin expansion on that front.

And then the final thing I would say is, and I mentioned this a couple of calls ago, where we have deployed our process improvement teams from the corporate office into each of our divisions.

And I think that's going to be a very innovative organizational solution for HCA where it brings expertise in different areas, it puts our process improvement teams more closely aligned with our operating teams in the field, as opposed to the episodic approach that we had in the past.

That structure is going to assist us with finding new opportunities, in my estimation, and helping us maintain our costs.

Okay.

Thanks a lot.

Milt, you want to --

I think Sam gave a very thorough answer to the question, but I'd maybe just like to highlight one aspect.

One thing that we're doing today, and we're early stages into it, is using data analytics and big data techniques in terms -- with our clinical agenda.

And what we're seeing is improved outcomes, improved quality, but also I think improving cost as a result.

So it's a win-win.

I think we're early into that.

Sam mentioned clinical excellence, that's a program I think that illustrates that very well.

We are excited about the future as we continue that.

We're adding physician talent to support that as well, as well as technology talent.

So that's an area, over the coming years, you'll hear more about and we're now seeing the early stages of the benefits of some of that work.

Very good.

Chris Rigg, Susquehanna Financial Group.

Good morning.

Thanks for my question.

I guess the one thing that I'd be interested to get your insights on, and it's more theoretical; but when you think about the persistency of demand from the newly insured, I'm just trying to get a sense for whether you think that the people who are using the system right now, with new insurance, that that's going to persist for several quarters or several years, and they'll be chronically [hiring] users of the system?

Or that over time it sort of winds down a little bit?

Thanks.

I'll try and then Bill can add on.

I think that is one of the variables where there's a lot of uncertainty in.

We read about it, that's what we're keeping our eyes on.

I think one could kind of argue that as people get newly insured, there may be some pent up demand.

And so in the early, early periods of coverage that's where you start to see some of the higher demand and maybe some of the outpatient and others trails off.

I think that the uncertainty around the future of health reform, that's just a factor of utilization trends we're going to have to monitor.

As we look forward and see really the progression throughout the early periods of health reform, we have seen higher utilization rates than maybe we originally anticipated.

Where do they go for the balance of the year?

We are making some assumptions that the month-over-month grow will moderate but will still grow.

So I think we'll just have to continue our eye on the inpatient demand versus there might be a trailing outpatient demand for that new coverage.

I think we need to pull the demand discussion up a little higher than just the exchange piece.

When you look at HCA's markets, and we've talked about this before, we think we have some great markets.

We think the trends within those markets are improving and we're seeing some of that in the results in the second quarter.

And so the demand discussion I think is more relevant at the top than it is just inside of this small subset of our overall business.

We're encouraged by the developments in a lot of our markets and we're hopeful that we'll continue to see positive signs there.

And Milt, you had a couple of stats as you look at some --

Yes.

To Sam's point about pulling it up, pull up and think about in our markets the overall economy.

We are seeing improvement in the economy.

I've got a few stats here.

These are from national bureaus and the like and data banks.

And unfortunately national data is more current than state and then down to MSA level, but just give you a couple.

So one thing we look at is the sale tax growth.

So you look at HCA's top six states, in four of the six, we are seeing sales tax growth equal or exceeding the national averages, or 67% of our top six states.

If you look at birthrate changes, there in our top six states 50% of our three, of our top six states where we operate, again, growth higher than the national average as a benchmark.

Then just on the MSAs, and I think these two are very important, overall unemployment percent.

You go to the MSA level, look in HCA's top ten markets.

100% or ten out of ten of our markets have overall unemployment rates that are lower than the national average is.

If you look at the trend change and how that's changing, in six of our ten top markets we are seeing improvement faster than the national averages.

So I think that gives us some view that some of this improvement may be based upon some underlying improvement in the economies in some of our markets and states where we do business.

Chris, thank you.

Thank you.

Kevin Fischbeck, Bank of America Merrill Lynch.

Just wanted to go back to reform for a minute.

Obviously you guys raised your guidance for reform for the year.

Wanted to understand two things.

First, what were the main drivers, it seems like you highlighted a number of things, just trying to understand exactly how each of them contributed around -- it looks like maybe you're expecting more of the people that were exchanged to actually being newly insured.

You talked in the past about steerage.

Has that assumption changed at all?

It sounds like acuity had changed a little bit.

How did pricing impact that assumption?

If you can go to kind of the main pushes and takes around what drove it and maybe what's changed or what hasn't changed?

And then finally, I just think about the second half of the year, it seems to me like your guidance basically assumes that the Q2 reform benefit is flat in Q3 and Q4.

I just wanted to make sure that I had that right.

This is Bill.

I'll try to answer that.

When we went in and gave our original guidance in January, there were clearly a lot of uncertainties as we went into health reform; enrollment and exchanges was uncertain at the time.

Kind of what the utilization patterns would be for the newly insured.

We talked through that in our January call.

A couple things have been updated now that we got six months or so of experience.

I think one of the first ones is enrollment was greater than we originally anticipated.

At the time in January we were sitting there with probably 2.5 million, 3 million people enrolled in exchanges and used some assumptions bouncing off CBO estimates and we saw that exceed.

I think that is really a key driver.

And in the corresponding utilization and how it ramped up was probably a little bit more -- it happened a lot faster than maybe we anticipated.

Then I'd say, the other third variable would be in the Medicaid expansion states, the shift into the decline in uninsureds and the increase in Medicaid.

In those four expansion states, even though it's a relatively small percentage of our footprint, about 12% of our beds, I think that change in mix happened quicker than maybe originally anticipated.

So, those were really the three major variables, that as we've got six months now of reform experience and this has caused us to revise what our original estimates were in January, where we didn't have a lot of visibility into those factors.

We'll just take one more question.

Andrew Schenker, Morgan Stanley.

Thanks.

I'm going to try to squeeze just one clarifier in before my question.

You mentioned, I think, out of non-Medicaid expansion states down 2% in uninsured volumes year to date.

But if I'm not mistaken, you were up about 6% in the first quarter.

So does that imply actually an 8% decline in those states in the second quarter?

Then just thinking about, sorry, network access here.

You had strong emergency room visits in the quarter.

Were you seeing any out of network lives and does that affect any of your views on exchange contracting going forward?

Thanks.

This is Bill.

Your numbers were correct on that in terms of the uninsured in our non-expansion states.

So we did see some developments occur through there.

You still have some Medicaid access and health exchanges of newly insured that is affecting the uninsured declines in our non-expansion states as well.

So we read those as positive developments as well.

Relative to the out of network, in network, still the majority of our exchange volume is in network.

We are seeing some of that on an out-of-network basis, and our collection rates of our exchange population is really consistent with the collection patterns that we are seeing for our entire book of business.

Right.

Andrew, thank you.

Milton, anything you want to close with?

Sure.

No questions on our capital allocation.

And I thought it was interesting.

Now this is the third anniversary quarter since our IPO in 2011.

And just looking at the amount of cash flow generated and the allocation of that capital, I thought, was an interesting point.

Our net cash-provided operating activities since the IPO in 2011 is $12.5 billion of cash flow from operations.

Our first priority has been to reinvest in our existing markets and existing assets and expanding our access points in our markets.

And there we have spent $6.1 billion of cash.

Acquisitions, $2.4 billion of cash in the past three years.

Most of that being the HealthOne acquisition a few years ago.

Special dividends, distributions to stockholders, $3.2 billion.

And then repurchase of our common stock.

I mentioned in my comments that in the last nine months we have repurchased $1.25 billion, but over the last three years that actually totals just under $2.8 billion of share repurchase.

So, I think that what this illustrates over the last three years the Company has been very opportunistic in terms of its capital allocation, methodology, and approach and I see that's what we will continue to do in the future, Vic.

All right, Milt.

Thank you, thank everyone.

Thank everyone on the call.

Mark Kimbrough is anxiously awaiting all your calls.

So you all have a great day.

That concludes today's presentation.

Thank you for your participation.