美國醫院公司 (HCA) 2015 Q1 法說會逐字稿

Hello, and welcome to the HCA first quarter 2015 earnings conference call.

Today's call is being recorded.

At this time, I'd like to turn the call over to the Senior Vice President, Mr. Vic Campbell.

Good morning, everyone.

Thank you, Sheila.

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

With me here this morning, as usual, our Chairman and CEO Milton Johnson; Sam Hazen, our Chief Operating Officer; and Bill Rutherford; our CFO.

Before I turn the call over to Milton, 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.

Several 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 undo reliance on these statements.

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

On this morning's call, we may reference measures such as adjusted EBITDA and net income attributable to HCA Holdings Inc.

excluding losses or gains of sales of facilities, losses on retirement of debt, and legal claims cost, which are Non-GAAP financial measures.

A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HCA Holdings Inc.

to adjusted EBITDA is included in the Company's fourth quarter earnings release.

This morning's call is being recorded.

The replay will be available later today.

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

Thank you Vic, and good morning to everyone joining us on the call or the webcast.

I trust most of you have had the opportunity to review our full quarterly earnings release issued for this morning, which is consistent with the Company's April 15th preview to the quarter.

I'll make a few remarks, then turn the call over to Sam and Bill to provide more detail on the quarter's results.

We were extremely pleased with our first quarter performance.

The quarter's performance was once again highlighting strong volume trends, favorable payer mix, and excellent expense management.

EBITDA for the quarter increased 19.3% to $1.961 billion, compared to $1.644 billion in last year's first quarter.

If you adjust the quarter's performance for electronic health record incentive income and share-based compensation, adjusted EBITDA increased 20.6% over the prior year.

Net income attributable to HCA Holdings, excluding gains of sales of facilities and legal claim costs, increased 53%, and diluted earnings per share increased 60.7% over the prior year's first quarter.

The same-facility admissions increased 5.1%, and adjusted admissions increased 6.8% over the prior year's first quarter.

This is the largest year over year quarterly volume growth rate in the Company's last ten years.

The growth was broad-based, across markets and service lines.

Our same facility ER volumes remain robust, increasing 11.5% over the prior year, while surgical volumes also reflect solid growth over the prior year.

With respect to health reform, as expected we saw increasing levels of exchange volumes during the quarter.

Bill will provide additional details in a moment.

Due to the strength of the quarter and our revised outlook for the year, we have raised our guidance ranges for 2015.

We believe revenues should now range between $39 billion to $40 billion.

Adjusted EBITDA is expected to range between $7.55 billion and $7.85 billion, and earnings per share should range between $4.90 and $5.30 per share.

There are a number of assumptions embedded in our guidance that are included in our release this morning, and I would encourage you to review them.

We had another strong cash flow quarter, with cash flows activities increasing to $1.018 billion, compared to $443 million in last year's first quarter.

As I stated in last quarter's earnings call, one of our key strengths is our ability to create shareholder value and capital deployment.

We deployed approximately $446 million in capital spending back into our markets, and also used approximately $366 million to repurchase approximately 5.2 million shares of our common stock.

As of April 30th, 2015, we had repurchased approximately 10.6 million shares of our stock, including 3.8 million shares from Bain Capital, and have expended approximately $781 million of the $1 billion authorization from February 2015.

As noted in our release this morning, we announced that the Board has approved a new $1 billion share repurchase authorization.

Also as noted in our release this morning, we plan to increase our capital spend during the next three years by $500 million, to $7.7 billion.

The additional capital spend will allow us to expand our service capabilities to meet increasing market demand.

Sam will discuss this in more detail in a moment.

We continue to advance our patient safety, quality of care, and patient experience objectives.

Our focus is to continue to strengthen our delivery system capabilities, and I believe we are strategically positioning the Company to deliver value for all of our stake holders.

Finally, I would like to congratulate Dr. Jonathan Perlin, our President of Clinical Services and our CMO, and he assumes the chairman role of the American Hospital Association.

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

Good morning, everybody.

As Milton indicated, we had a strong quarter, driven by strong volume growth and excellent suspense management.

I'll give you some more detail on our performance, and then discuss our health reform trends.

As we reported in the first quarter, same facility admissions increased 5.1% over the prior year, and equivalent admissions increased 6.8%.

Sam will provide more color on the drivers of this volume in a moment, but I'll give you some trends by payer class.

During the first quarter, same facility Medicare admissions and equivalent admissions increased 5.9% and 6.8%, respectively.

This does include both traditional and managed Medicare.

Managed Medicare admissions increased 14.3% on a same facility basis, and now represent 32.2% of our total Medicare admissions.

Same facility Medicaid admissions and equivalent admissions increased 10.6% and 13.9%, respectively in the quarter.

Fairly consistent with our recent trends.

We continue to see strength in our six expansion states, but also have seen strength in our non-expansion states as well, and I'll provide some additional comments on Medicaid in my health reform comments.

Same facility self-pay and charity admissions declined 12.5% in the quarter, while equivalent admissions increased 5.1%.

These represent 6.3% of our total admissions, compared to 7.6% last year, and continue to trend favorably for the Company.

Managed care and other, including exchange admissions, increased 5.8%.

Equivalent admissions increased 7.7% on a same facility basis in the first quarter, compared to the prior year.

Same facility emergency room visits increased 11.5% in the quarter compared to the prior year, and same facilities self-pay and charity ER visits represent 18.6% of our total ER visits in the quarter, compared to 22% last year.

Intensity of service or [acuity] moderately increased in the quarter, with our same facility case mix increasing 26%, comparing the prior year period.

Same facility surgeries increased 2% in the quarter, with same facility in-patient surgeries increasing 3%, and outpatient surgeries increasing 1.4% from the prior year.

Same facility revenue per equivalent admission increased 1.6% in the quarter.

This one's softer than our recent trends.

Currency translation rates for our international division and [Texas] waiver revenues impacted our reported number.

Same facility revenue per equivalent admission for our US domestic operations, excluding waiver revenues, increased 2.1% over the prior year.

Our outpatient revenue, as a percent of total, was 37.7% versus 36.9% in the prior year, and that also diluted NRAA slightly.

Same facility managed care and other, including exchanges, revenue per equivalent admission increased 2.3% in the quarter.

Same facility charity care and uninsured discounts increased $175 million in the quarter compared to the prior year.

Same facility charity care discounts totaled $807 million, a decline of $37 million from the prior period, while same facility uninsured discounts totaled $2.507 billion, an increase of $212 million over the prior year period.

Now, turning to expenses.

Expense management in the quarter was excellent, as we were able to leverage strong volumes.

Same facility operating expense per equivalent admission declined 0.7% compared to last year's first quarter, and this led to an improvement of 170 basis points in adjusted EBITDA margins in the quarter to 20.3%.

Salaries and benefits as a percent of revenues improved by 40 basis points to 45.5%, compared to 45.9% in the last year's first quarter.

Salaries per equivalent admission increased 0.4% in the quarter on a same facility basis, leveraging our strong volume in the quarter.

Same facility supply expense per equivalent admission declined 0.6% in the first quarter compared to the prior year period, an improvement of 40 basis points as a percentage of revenue from last year's first quarter, reflecting continued success on several supply chain initiatives.

Other operating expenses improved 90 basis points from last year's first quarter to 17.7% of revenues.

We did recognize $19 million electronic health record income in the quarter compared to $30 million last year, and that's consistent with our expectations.

As previously mentioned, our as reported adjusted EBITDA margins increased 170 basis points, and adjusting for HER incentive income and share based compensation, adjusted EBITDA margins increased 190 basis points over prior year for the quarter.

We touched briefly on cash flow.

We had another extremely strong quarter, with cash flow from operations increasing to $1.018 billion at the end of the quarter.

At the end of the quarter, we had approximately $2.587 billion available under our revolving credit facilities.

Debt to adjusted EBITDA was 3.8 times at March 31, 2015, compared to 3.96 at the end of 2014 and 4.35 at the end of the first quarter of 2014.

So, let me spend a minute talking about health reform.

Health reform activity was strong for the quarter.

In the first quarter, we saw approximately 9,880 exchange admissions, as compared to the 1600 we saw in the first quarter of last year.

You may recall we saw about 7,700 exchange admissions in the fourth quarter of 2014, for a 28% increase quarter to quarter, and we believe this is largely due to the new enrollment.

We saw approximately 37,000 exchange ER visits in the first quarter, compared to the 4,000 in the first quarter of 2014, and 26,000 in the fourth quarter of 2014.

We have a history on about 50% of our quarter one exchange volume.

And based on our look back of previous coverage, we estimate about 40% of these admissions were uninsured prior to health reform.

Given this as the second year of reform, we are also tracking what the (technical difficulties) was in 2014.

Based on the exchange patients where we have 2014 experience, 36% were previously covered under a [HICS] product, 39% were covered by another insurance product, and 25% were uninsured in 2014.

We will continue to evaluate these metrics throughout the year.

In our six Medicaid expansion states, our trends in the first quarter were consistent with what we saw in the second half of 2014.

In these states, uninsured admissions were down 59% compared to the first quarter of 2014, and Medicaid admissions were up 31% in the expansion states.

For reference, in our non-expansion states, same-store uninsured admissions were down 8.2% and Medicaid admissions were up 7.2%.

When we roll all the components of health reform that we can track, we currently estimate health reform contributed just over 5% of adjusted EBITDA for the quarter, and in line with our expectations for the quarter.

So that includes my remarks and I'll turn the call over to Sam for some additional comments.

Good morning.

As mentioned earlier, volume growth was strong in the quarter, and it continued to accelerate compared to the previous four quarters in 2014.

As I stated in my fourth quarter comments, we believe this performance reflects improving macroeconomic trends in many of our markets, and we also believe it reflects market share gains, which have been driven by a combination of solid execution of our growth agenda by our operating teams and capital spending that has been invested both to increase access to our networks and to add operational capacity.

There were no unusual factors that contributed to the quarter's accelerated growth.

Admissions with a flu-related diagnosis were up, but the overall effect on volume growth is minimal.

Growth in volume was once again broad-based, across most of the Company's markets.

It was also broad-based across the various service lines of our business.

On a year over year basis for the quarter, all of our 14 domestic divisions had growth in admissions, growth in adjusted admissions, and growth in emergency room visits.

All but one division had growth in both managed care and exchange admissions and adjusted admissions.

For the Company, managed care and exchange ER visits grew by 13.4%.

All divisions had growth in the emergency room visits for these two payer classes.

All but two divisions had growth in in-patient surgeries, surgical admissions accounted for 26.6% of total admissions for the quarter, down slightly from 27.2% in the first quarter of the previous year.

This quarter is the eighth straight quarter where we've had growth in in-patient surgeries.

Nine divisions had growth in hospital-based outpatient surgeries, which were up 1.7% for the Company.

Hospital-based outpatient surgical volumes have grown in seven out of the last eight quarters.

Our ambulance surgery division also had growth in the quarter.

Surgeries in this division were up almost 1%.

Most service lines had some level of surgical growth, with notable growth in orthopedics, cardiovascular, and neurosurgery.

Outpatient revenue for the Company grew by almost 12% in the quarter, and represented 37.7% of total patient revenues.

Other categories of our in-patient visits were strong, also.

Deliveries for the quarter were up 3.1%, with ten divisions showing growth.

Managed care and exchange deliveries were up almost 8%.

11 divisions had growth in these payer classes.

Neonatal admissions grew 7.3%.

Behavioral health admissions were 11.7%.

Rehab admissions were up 14.1%, and average length of stay grew by 1%, reflecting the higher case mix in acuity for our admissions.

Market Share trends for the Company for the 12-month period, ended September 2014, were generally consistent with past trends.

Market share grew by 13 basis points to about 24%.

Approximately 65% of our markets increased share across most service lines.

Of particular note was the rebound in overall in-patient demand, which increased in the third quarter across HCA markets by slightly over 2%.

Commercial demand was even more notable with an increase of over 6%.

We believe demand in both the fourth quarter of 2014 and the first quarter of 2015 were equally strong.

We will report on these quarters when the data is available.

HCA has a comprehensive growth agenda that we believe is driving sustainable market share gains and overall results.

We continue to in our local markets at significant levels, but occupancy and utilization levels have grown to the point where we need to increase our capital spending to maintain the capacity for future growth.

Bed occupancy levels have grown over 70% of operating beds, and in many fast-growing markets they are running at even higher levels.

ER bed utilization, even with the significant investments we have made over the past few years to add capacity in this service line, has grown about 7% and is now over 85%.

The anticipated increase in capital spending that we announced we'll provide over the next few years, more capital in our markets to add in-patient bed capacity, increase emergency room capacity, enhance service line offerings, and add necessary equipment for our nurses and surgeons.

In certain markets, capital spending will be deployed for new hospitals and new outpatient facilities.

Many of our projects have a lead time that requires us to get started soon to address these capacity constraints.

And finally, managed care and exchange contracting continue to progress as planned.

The Company is currently contracted for almost 95% of its revenue for 2015, 65% of its revenue for 2016, and 45% of its revenue for 2017.

The pricing terms and the non-pricing terms of these contracts are generally consistent with the previous year's terms.

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

Sam, thank you.

Sheila, if you can come back on and poll for questions, and I would ask that everyone limit your questions to one, so we can give everybody an opportunity.

(Operator Instructions)

We'll have our first question from Matthew Borsch, Goldman Sachs.

In light of the strength of results, I want to ask, if you can touch on it, what you saw over the course of the quarter?

If there's any granularity you can give us on the three months, as they developed?

Perhaps any impact that you saw from the weather, although I know that was pretty northeast centric?

And then, anything at all you can say about what you've seen into April?

Thank you.

Sam Hazen?

I can tell you right now, we don't touch on April.

We stay with the quarter, but Sam will take the rest.

You have to, in any particular quarter, consider the business day compliment within each of the months, and I want to say we had a headwind in January and a tailwind in March with respect to the calendar, as far as business days are concerned.

So that influenced each of the months accordingly.

Nonetheless in each of the three months we had pretty solid volume growth, if remember correctly, across most of our metrics.

March was clearly the best month for the quarter because of the size of the month, the number of business days that we had, and so forth.

And I think from that standpoint, we had a pretty steady performance throughout the quarter, with a little bit of acceleration in the month of March given the calendar benefit.

As it pertains to weather, we did have weather in a number of our markets, in Texas, also in Tennessee and Kansas City, but those tended to wash out I think reasonably well in the quarter and really did not have any kind of material impact on the volumes.

Matt, thank you.

We'll go next to Frank Morgan, RBC Capital Markets.

Yes.

Clearly very strong results.

I'm just curious, with this strength in the volume and the growth in the economy, are you seeing any wage pressure?

Are you planning on that, in light of all the growth that you're seeing?

And then, with this capital deployment you're putting in place accelerating that with a buyback, would that necessarily preclude you from the M&A market?

Sam will address wage, and Bill will take the other one.

We have had, in certain markets, where the economy has historically been a little bit better, seen some level of wage pressure.

We've been able to deal with that on the fly, if you will, and we've adjusted certain compensation programs and so forth to give ourselves capacity to address some of those challenges.

We are benefiting over the last few years from a relatively low inflationary environment, and we are considering that in evaluating what we can do to prepare ourselves for possibly some level of inflation over time.

I do think it will happen from one market to the other.

It won't happen in one big step across the whole organization.

Having said that, in the first quarter, we did have a higher level of contract labor utilization than we typically have, but we attributed most of that to the increased levels of volume that we saw in the quarter, and we had to staff that at some level with additional contract head counts.

We think that will normalize as the volumes normalize over the course of the year.

But from that standpoint, Frank, we are not considering any short-term pressures with wages that are creating a problem for us.

On the capital deployment strategy, Frank, we've been saying, now really for a number of years, that we have a diversified strategy with respect to capital deployment.

We always try to be optimistic with how we deploy capital.

So this quarter I think is a really good example.

We're stepping up our capital spend, as Sam described, in many of our markets to meet anticipated demand in those markets.

At the same time, another $1 billion share repurchase authorization.

And again we have continued to look for acquisitions that fit our profile.

Our balance sheet today, the leverage ratio is the lowest point it's been since we entered the LBO in the fourth quarter of 2006.

Our cash flow is as strong as it's been, I think, in the history of the Company.

So we've gained financial flexibility.

So we'll continue to deploy capital in a way that we think will maximize shareholder value and shareholder returns.

At the same time, with a view towards continuing to invest in our business for the long term.

And in the markets that we're in, of course, we're seeing a lot of good opportunities in improving economic conditions, as well, and all that contributes in our change in outlook relative how much capital we plan to deploy in these markets.

But, we don't see that any of these steps, relative to share repurchase nor the additional capital spend, in any way reducing our flexibility to be acquisitive if we have the opportunity.

Good.

Thank you, Frank.

We'll go next to Ralph Giacobbe, Credit Suisse.

You mentioned Debt-to-EBITDA down 3.8 times.

I think historically, you've talked about being comfortable in the 4, 4.5 times range.

I guess at this point, how should we think about your appetite to lever up a bit?

Maybe talk a little bit about the M&A pipeline?

And just along those lines, there seems to be more interest in JV's or partnerships out there among hospitals.

Is this something that you all are interested in, or maybe has that been a hurdle as to why we haven't seen larger system sales to this point?

Thanks.

This is Milton.

Let me touch on a bit of that, and then maybe Bill Rutherford will want to comment on this as well.

Ralph, we're actively looking for the right acquisition opportunities for HCA.

We do have a profile that we're looking for, and particularly moving into new markets, for example, expanding in our existing markets, that's been more -- of course, what we've been doing in recent years is more of what I would call the tuck-in acquisition.

Again, we like those as well, but they tend to be smaller, as far as relative to HCA as a total Company.

But we're always looking for line opportunities.

We potentially have transactions in some phase of development.

Many times though, obviously in the last few years, they haven't moved to closure.

But we're continuing to look.

We think that we have a lot to offer to a strategic player out there relative to bringing our size and scale to the marketplace, and some of our operating capabilities as well.

So we're -- we continue to be interested.

As I said many times over the recent years, it's very hard to predict when the opportunities will come.

They tend to come and go.

At our pace, It's hard for us necessarily to manage.

We would also be interested in joint venture opportunities.

When we meet with a strategic potential about a potential transaction, it doesn't always have to be a 100% acquisition.

We would consider partnerships.

As you know we operate several significant partnerships in our portfolio and some major markets.

We have a lot of experience with success in doing that, and we would continue to have that as an option, if in fact we had a willing partner who wanted to move in that direction.

Bill, you want to --

Yes, I just want to speak to the balance sheet, Ralph.

As we've said, our leverage target range is 3.5 to 4.5 times.

Given our size, a full turn is almost $7.5 billion, so that gives us a lot of flexibility within that range.

Especially considering we're sitting here at 3 8, right now.

I think if you look at opportunities in the marketplace, if the right opportunities came along, I think we have got plenty of flexibility to operate within that range to lever up, if the right opportunity came up.

Our acquisition pipeline still is active in the outpatient area, and the other services we remain active on.

Growing those outpatient, you've seen us do acquisitions of a smaller size even last year.

I think our balance sheet is really strong, gives us a lot of flexibility, and I think given our stated ranges and given our size, I think we have got plenty of capital capacity to execute on a variety of market opportunities.

Thank you, Ralph.

We'll go next to Darren Lehrich, Deutsche Bank.

This is in for [Josh] (inaudible).

I just wanted to ask what the Company's contingency plans are in the event that the Supreme Court sides with King?

Then, related to that, hope you can give us the approximate exposure on a run-rate basis to the ACA benefit from exchanges, and how much of that is in the federal marketplaces?

Thanks.

Thank you.

Milt, do you want to lead off, just on this comment?

Yes.

You know, I mean -- one thing about our operating strategies that we're investing in.

You know, these strategies are effective either in an exchange product or reform environment, or what I would call our core environment.

They're effective either way.

So I don't see any significant change in our operating strategy at all if the Supreme Court decision rules against the government.

Now as a contingency plan, we always look at opportunities to react to the marketplace, but quite frankly, you know, again our main operating strategies are going to be effective either in a reform environment, or not.

I think that, with respect to the Washington aspect, you know, we're very active and Vic of course is head of our government relations, we're very active in Washington.

We would work very, very hard in Washington to lobby for some sort of other program, if in fact there was some sort of transition plan.

So a number of things we'd be doing in Washington as a contingency plan, but as you know, I'm not going to tell you that we can predict the outcome of what's going to happen in Washington.

But we certainly would be very active, as we are today, in terms of getting our voice heard by the decision makers in Washington.

I guess I'd add to that -- this is Vic -- almost weekly, when I go to DC, I see more and more concern about individuals needing these subsidies in these states, and whether you're talking to Democrats or the Republicans, I think there's a strong belief we can't lose these subsidies, and the other thing that you're seeing is that they're looking at a longer period of time to try to keep the subsidies in place.

It's not -- we don't know what the Supreme Court will rule, if it goes the other way, but I think the belief is by most members of Congress is that this has to be extended for some length of time to allow those people to keep their subsidies.

I'll just add on to this just a couple other points, just remind you that our exchange admissions were basically 2% of the total HCA admissions.

If I go by just state enrollment trends, about 75% to 80% of our states are in federally run exchanges, with 20% to 25% in state-run exchanges, in response to your question.

And then, as we indicated in my comments, we're estimating that reform contributed about 5% of adjusted EBITDA for the Company in the first quarter.

Go north of that from the balance year, as it progresses, so I think back to Milt's point that core business and core HCA operations still remains very strong.

Darren, thank you.

We'll go next to Andrew Schenker, Morgan Stanley.

Thanks.

Just following up on the comment, you mentioned some of the strength earlier.

Would you be able to perhaps give some additional anecdotal indication of how, economically sense, volumes are progressing?

You noted orthopedics earlier, any trend in obstetrics, et cetera?

And then any geographic variations like Texas are worth calling out, relative to the rest of the portfolio?

Andrew, Thank you.

Sam, you want to--

It's very hard to sit here and attribute a certain component of volume to one thing or the other, but using commercial demand from our market share analysis and the proxy for overall economic health, the best metric for that is the third quarter of 2014 for commercial demand across all HCA's 42 markets was up 6%.

That was fairly broad based.

We had some markets that are better than that, and some markets that are slightly worse than that.

So when I look the at the first quarter and I look at our commercial volumes across the various service lines and compare it to the third quarter, they're very similar.

So it would suggest similar commercial demand growth overall, and we'll get that data sometime in the next four to five months.

I'll be able to put that out and verify that conclusion.

But specific to Texas, Texas's overall metrics across the eight markets, where we do business in Texas, we're generally consistent with the rest of the Company when it comes to top line activity and when it comes to payer mix activity.

So there weren't any noticeable headwinds in Texas.

We did pay particular attention to Houston, given the energy economy there, and again HCA had pretty strong performance from a top line standpoint in the market, Houston by itself.

I look at obstetric demand, which is up I think double digits, commercial emergency room demand very strong, and then even in our physician practices, we saw a slight improvement in our payer mix.

Again, I think reflecting some of the volume and some of the dynamics within our marketplace.

Thank you.

Thank you, Andrew.

We'll go next to Sheryl Skolnick, Mizuho.

Thank you very much.

I'm going to ask a question I'm not sure you're going to be able to answer, but when I look at your margins, I get the scale.

I get the argument of the density and the clustering and all the things that you do right.

So I understand that.

But your margins are a whole lot better than everyone else's.

So A, congratulations, good job.

B, please keep it up.

And C, how do you keep it up?

Is it through the pricing?

Are there things that you're able to do and accomplish that others can't that you can attribute some portion of?

You have to have looked at it at some point, I would imagine, because it is noticeable.

It is striking.

Of course, it's what drives that such superlative cash flow that we talk about.

So thank you.

Sheryl, thank you for the question.

Sam is really smiling over here.

He obviously is doing a great job.

There are a lot of things he can talk about.

Well, I think, Sheryl, when I look at the Company -- I can't speak to the dynamics particularly inside all the other companies and what their margins are, because we have some variation within our portfolio of hospitals, as you can imagine.

I will say it's fairly tight when it comes to high performance, low performance and then (inaudible) [around the mean].

The thing, I think, that we believe is driving margin production inside of HCA, you mentioned scale.

We do believe leveraging the scale, continuing to find ways to leverage our scale, both on making our business better with respect to quality, efficiency, patient experience, all those kind of things, are very helpful in the discussion here.

And then finding ways, again, to take out administrative costs, we're able to do that.

The other thing that I think is important to the Company from a margin standpoint, is we do have growing complexity of services that we offer, and typically speaking more complicated service offerings would generate higher margins.

And when you put that on a fixed cost base like our hospitals have, the operating leverage that comes from that is very powerful.

So we've been very intentional over the past four or five years to add more complexity to our facility offering, and in most of our markets, make sure we can offer pretty much any service to any patient that needs care.

So if they hit an HCA system as an outpatient or in a physician practice somewhere, how do we keep that patient in the system by having a full complement of services?

That has helped us on the margin.

The third thing is, we have been able to maintain our competitive position, which has allowed us to get reasonable reimbursement increases from our payers, and that's helpful, obviously, from a margin standpoint.

Then the fourth thing, already mentioned, we have been intentional about our efforts to grow our commercial market share and put ourselves in a position to generate margins from that particular segment.

And I think again, coupling our service line offerings, our capital deployment, our outreach strategy, and focus this specifically on the commercial segment, has allowed us to generate healthy margins for the Company.

So those are some of the things that we focus on.

Those are some of the things that we're fairly intentional with, as it relates to resource allocations, tactical approaches in certain markets, and so forth.

Then the last thing, and I think this is a powerful and tangible asset for HCA, and one that we're getting better at each and every year, is leveraging the learnings that we see across the various marketplaces.

If we see a great physician strategy, or we see a great outreach strategy, or program strategy or quality initiative, whatever the case may be, bottling that up, finding a way to get it to the marketplace quickly is something we're getting better at, and I think we'll continue to gain ground over the years, and that will also help with us our margin initiative as well.

Sam, thanks.

Milt, do you want to add something?

I think Sam described it very well.

I was going to reinforce his last comment, around our ability to really identify best practices and then to move those across the Company.

I think we're -- as Sam said, we're more effective in doing that today than we've ever been, in terms of getting these best practices implemented across different markets.

Then I just also have to say to our teams, across our divisions and our groups and Sam, is the ability to execute.

We have a team that really understands execution and accountability, and right now there's just a lot of momentum in the organization, and I think we're seeing our teams really execute on our agenda across the board, and that's helping drive the top line, of course contributing to the margin expansion, as well.

Sheryl, thank you.

We'll go next to Josh Raskin, Barclays.

Thanks.

Question on the broad topic of value based reimbursement, or risk taking and maybe even as far as provider, sponsors, health plans.

Seems like there's been a lot more movement in maybe the non-for-profit world around some of that.

I'm curious what sort of exposure HCA has to some of those arrangements, and broadly what your thoughts are on the Company's [subsidiaries desire] to take risks or share risks or in some way get paid on value, as opposed to fee per service.

Sure.

Maybe take the last part of that question, and go back to the value equation.

We're, as a company, we're not looking to move in -- to take risk.

We don't see that right now, in the intermediate term, as something that we need to do.

Now, do we have markets where we are taking a certain amount of risk that's not material to the Company?

Sure.

We have pilots going on.

We have experiments going on across different revenue models from the bundled payments, from shared savings program, pay-for-performance programs.

We have, in Tampa, a physician group where we're at full risk, with about 35,000 lives.

So, we have some things going on that allow us to see the market place, but in the aggregate those are not material to HCA's operations at this point in time.

And we don't feel a sense of urgency that we need to move that way.

I know some in the industry may see that differently, but that's where we see it.

With respect to value, and we talk a lot in our organization about health care and the value that we need to bring to our markets, and we see right now, our value as being turned by improving, number one, patient safety, patient quality, patient experience, access points sort of makes our system accessible, easy to get in to.

Easy to asses from a patient standpoint.

From a physician standpoint.

From the standpoint of [providing] capability that Sam talked about, in terms of being able to take care of any patient's needs, from basic to some of the more complex acute care that they may need in the market place.

So, if we can deliver high quality, and we're efficient as an operator, and have at our access points, and we've seen all those factors contributing to real value to patients, values to employers, value to payers.

And that's what we're focused on.

That's what we're executing today.

That's our agenda.

Again, we'll keep an eye on the market place, and watch how this risk revenue model plays out.

But -- and we're looking at 42 different markets across HCA, and you know all markets are a little bit different.

But we're certainly not feeling any pressure to have to move our revenue to a risk model here any time soon.

Josh, thank you.

We'll go next to Kevin Fischbeck, Bank of America, Merrill Lynch.

Good morning.

This is actually Joanna Gajuk, filling in for Kevin.

Thanks for taking the question here.

You raised the guidance with Q1, obviously a very strong quarter, but can you maybe flesh out the biggest variance in terms of why you're so confident in the year, as to raise it?

And then, on the guidance, where you stand in terms of the same-store adjusted admission?

2%, 3% you gave before, and pricing of 2% to 4%, you gave before as rough?

Thank you.

Thank you very much.

Bill, you want that one?

Obviously, we finished 2014 very strong, and we carried a lot of momentum into the first quarter of 2015.

You don't always know how that momentum is going to fare as you cross calendar, but given our really strong performance in the first quarter, felt really it was necessary to update our guidance.

The majority of the updated guidance came from the strong performance in the first quarter.

Clearly, our raise of almost $200 million of adjusted EBITDA factored in continuing momentum in the balance of the year, and so we think -- we really feel very confident in that revised guidance.

It's largely continuing to carry the momentum we saw in the fourth quarter of 2014, in the first quarter.

We're not revising our volume of [rate, that] guidance that we gave in February during our call.

At this point in time, I think we still need some more quarters to get into detail, but given the strength of the first quarter performance, we thought it was necessary to up our guidance.

In fact if we hadn't, and you applied to the guidance for the balance of the year, we'd be relatively flattish year over year.

We feel very confident with the momentum we've got right now, and that really is what led to the revised guidance we previously released.

Thank you.

We'll go next to Ana Gupte, Leerink Partners.

Thanks.

Good morning.

I wanted to follow up on the commentary you had about strong Medicare admissions and managed Medicare admissions.

Is that likely just because there's more people in the system, because of the aging [domaries], or are you seeing something else in terms of in-patient authorizations?

I think it's both.

Sam mentioned it in some of his comments, it's really hard to dissect individual contribution, but I think the overall Company momentum contributed to that.

Clearly, I think increasing enrollment in Medicare, more in the Medicare Advantage as well, we're benefiting from.

But, kind of the other marketplace dynamics are in the Medicare payer class as well as in our other payer classes, so I think it's really a combination of a variety of factors that really go along with the volume drivers of our own core business.

This is Bill, let me just add.

We believe that Medicare business in general is not as economically dependent, obviously, as the commercial book, so the movement in Medicare is not going to be as pronounced as what we've seen on the commercial side of the equation.

So the aging of the baby boomers is going to continue to create opportunities for Medicare volume growth, and then gains in market share and program development and so forth are going to hopefully add additional volume opportunities for the company.

Ann, I thank you.

we'll go next to Brian Tanquilut with Jefferies.

Good morning, guys.

Question for Sam.

As we think about this capital plan, are there any specific areas where you're expanding, or is this just in general addition of in patient beds and ER beds at end-hospitals.

Or is this more of a targeted approach to specific growth areas within your hospitals?

Thanks.

It's general in the sense that it will go to what produces revenue for the Company which are the beds in the ER and the surgical equipment as you said.

I like to think we're heavily targeted in how we deploy capital, and we're looking at markets.

Specifically, we're looking at facilities within those markets, and then we're adding to the capability of those institutions.

We're bringing new institutions into the marketplace.

For example, over the past 18, 24 months we've added four new hospitals.

We've added numerous outpatient facilities to round out the convenience of the network for our patients so that it's easier for them access an HCA system.

So it's really the same approach, just more of it, because we have those kind of opportunities we believe in the marketplace, to continue the programs, the efforts, and hopefully the sustainable growth that we've seen over the past few years.

Thank you, Brian.

And let me just add one thing, there.

We do have certain markets, as I mentioned in my call today, where there are more pressing demand needs, and more pressing capital needs and so the Company will be focused on a handful of market share there.

We haven't finalized that plan specifically, yet, but we do see some opportunities specific to certain markets where there could be a little bit of an enhanced spend in those markets to really take advantage of the situation.

Thank you.

We'll go next to A.J. Rice, UBS.

Hello, everybody.

I might just ask you about the supplemental programs in Florida and Texas.

Obviously there's an aspect in the Texas Medicaid waiver that you're not currently booking.

Can you just comment on whether there's been anything behind the scenes, there?

Discussions, and whether you're actually getting the money, just not booking it?

And then more broadly, there's certainly been discussions about the back and forth between CMS and -- in Florida, about the low income pool, and about the Texas general Medicaid waiver.

Can you give us your perspective there, and sort of size of the exposure and what you think is going to happen, if anything?

Thanks, A.J. Bill will take --

Let me try to cover some of those.

First, let me address kind of on the Texas waiver.

As we indicated at the end of last year, we planned on reducing our revenue recognition to the Texas waiver.

In the first quarter, we recognized about $77 million of waiver revenues in Texas, compared to about $112 million in the first quarter of 2014.

So it was down $35 million, which is really consistent with our expectations, and I think the items we talked about last year.

We understand the CMS inquiry in Texas is continuing.

We don't have anything new to report on there, and so we're still keeping our eye on it.

Clearly, a lot of discussion with various programs, whether they come under the form of provider tax, UPL, low-income pool, it's -- we understand that all of those are really [approved and funded] with CMS, either as a state plan amendment, or a [115] waiver program.

And there's differentiating characteristics, as you know.

The state plan amendments are not time-limited, and generally, the state does not have to be asked to be reapproved for those, unless it modifies its Medicaid program.

Then we've got the 1115 waiver programs, which are time-limited, and states must ask for reapproval, and those are the issues in both Texas and Florida.

The Florida [LIF] has had a lot of publication on there.

We receive about $75 million annually from the Florida LIF funding.

We think it's really early to talk about what might happen with these programs.

With Texas, we know we have a waiver that goes through [930] at [16].

All of these programs are extremely important for the safety net of the hospitals in those states and communities.

So we'll continue to keep our eye on what's going on between CMS and so forth.

You think -- if there's programs at risk, it's in those 115 waivers and those non-expansion states, and really that's Texas and Florida for us.

Kansas City -- or Kansas and Tennessee are others; those are really smaller programs on there.

So we're going to keep our eye on it and see where that flows, but we don't have anything new to report on Texas, and our revenue recognition is really in line with what we talked about last year, until we get some more clarity on that.

Thank you, A.J.

We'll go next to Gary Lieberman, Wells Fargo.

Thanks, good morning, this is Ryan Halsted on for Gary.

Just wanted to ask a question about the commercial contracting.

As you're doing your contracts for 2016 and 2017, I'm just curious how much -- if you're seeing a move towards more narrowing of the networks?

It seemed like 2015 was a shift to narrow network for you guys versus 2014, so I'm just curious if you're seeing or if you're contemplating potentially going further with narrowing the networks in the out years?

Yes, this is Sam.

The short answer to the contracting provisions for 2016 and 2017, around there, on networks is that they haven't really changed materially at all.

On our core commercial contracts, there's hardly any changes with respect to that.

Within the exchange component of our contracting, as we indicated at the end of 2014 in our first call, for the fourth quarter of 2014 we have increased the number of exchange contracts for the Company, I think, about 35% to 37%.

And those -- some of those did include a narrow network component, others didn't.

So in global terms, there's not a lot of change at this particular point, and it looks as if our 2015, 2016 and 2017 contracting cycle is not going to have a lot of change, and we don't think it's in the best interests of the Company to push that particular strategy in most situations.

So I don't anticipate during this next 24- to 30-month cycle any material changes.

Thanks, Ryan.

We've got time for one more question.

That will come from John Ransom, Raymond James.

Hi, can you hear me?

Yes, we sure can, John.

Hi.

Just on the exchanges, you [did a] contract with 40% or so of the plans.

Did the out-of-network contribution from some of those members, was that -- has that been a material driver for you?

I won't say it was -- hey, John, this is Bill.

I'm [not sure] about 40%, we were really well represented, I think, with all but a couple of markets in [first-year] reform.

We did see some out of network in year one.

As Sam mentioned, I think, the increase in exchange contracts that we saw in year two addressed some of those.

So I won't say it was material.

We were seeing some out-of-network business in the reform, and the exchange business, in year one.

In year two, in several of those markets, we've gotten into the contracts in there.

So I won't classify it as it was a material driver for us, but it was a factor.

All right, thank you.

Thanks, John.

Thank you, everyone, for being on the call.

Mark Kimbrough will be here all day to take any questions you have, and I thank you very much.

That concludes today's conference.

Thank you for your participation.