美國醫院公司 (HCA) 2015 Q2 法說會逐字稿

Welcome to the HCA second-quarter 2015 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 the Senior Vice President, Mr. Vic Campbell.

Please go ahead, sir.

Thank you, Tracy, and good morning, everyone.

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

With me here this morning are Chairman and CEO, Milton Johnson; Sam Hazen, our Chief Operating Officer; and Bill Rutherford, CFO and Executive Vice President.

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, 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 undue 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 on 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 to adjusted EBITDA, is included in the Company's fourth-quarter earnings release.

As you know, the call is being recorded and a replay will be made available later today.

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

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

I hope you've had a chance to review the press release we've issued this morning.

This morning we released our complete second-quarter 2015 earnings, which is consistent with the Company's preview on July 15th.

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

Overall, we're very pleased with the second-quarter performance.

Consistent with recent trends, the quarter's performance was highlighted by strong volume growth, quality expense management and favorable service and payer mix.

Adjusted EBITDA increased to $2.008 billion in the quarter, compared to $2 billion last year, and remember that last year included an increase of $142 million in Texas Medicaid waiver revenue.

Excluding the waiver revenue adjustment from 2014 results, adjusted EBITDA increased 8.1% over the prior year.

If you normalize for the waiver payment and contact incentive income and share-based compensation, adjusted EBITDA would have increased 9.7% over the second quarter of last year, with adjusted EBITDA margin increasing by 20 basis points.

Earnings per diluted share, adjusted to exclude losses and gains in sales [facilities] and losses in terms of debt was $1.37 for the second quarters of both 2015 and 2014.

Further adjusting for the $0.20 per share related to the Texas Medicaid waiver revenue from the second-quarter 2014 results, adjusted earnings per diluted share would have increased 17.1% in the second quarter of 2015, compared to the second quarter of 2014.

The Company met another strong volume quarter, with same-facility equivalent admission growth of 4.9%, and same-facility admission growth of 4.1%, compared to the prior year's second quarter.

Once again, the strength and volume were broad based across our markets and our service lines.

Our same facility ER visits increased 7.4% compared to last year, while surgical volumes once again showed solid growth compared to the prior year.

We continued to see positive trends in overall market share gaines based on the latest data available.

Sam will provide more insight into our market share and volume trends in a moment.

Obviously, we're pleased that the Supreme Court has upheld subsidies for [no leans] on federally facilitated exchanges.

The decision was a positive outcome for our patients, employees, and shareholders.

As we've said before, we support efforts that improve access by providing affordable coverage for the uninsured.

We are pleased to have this decision behind us as we continue efforts to pursue further coverage expansion.

With respect to the second quarter of this year, we continued to see the positive effects of the ACA, consistent with our expectations.

Bill will provide additional detail in a moment.

Based on the results in the first six months of 2015, we are updating our full-year 2015 guidance for adjusted EBITDA to near the high end of our previous range of $7.55 billion to $7.85 billion, and near the high end of our adjusted EPS range of $4.90 to $5.30 per share, which reflects our stronger-than-anticipated volume growth year to date.

We now estimate that equivalent admission growth will be in the range of 4% to 5% for full year 2015.

I encourage you to review the assumptions embedded in our guidance, which are included in our release this morning.

We had a good cash flow quarter, with cash flow and operations totaling $1.057 billion.

While down $193 million from the previous year, this is primarily due to an increase of $301 million in income taxes this year.

We deployed $558 million in capital spending into our markets and also used $574 million to repurchase 7.47 million shares of our common stock.

At June 30, we had repurchased 12.552 million shares under our February 2015 share repurchase authorization, and we had $1.06 billion authorization remaining, inclusive of our May 2015 share repurchase authorization.

I would like to take this opportunity to tell you how pleased we are to have Tenet Healthcare joining HealthTrust Purchasing Group early next year as a partner member.

In 2014, HPG's total supply spend exceeded $23 billion, with approximately 1,350 acute care facilities with members.

HPG was selected for supply chain cost management solutions, including immediate contract value and depth of its supply chain management expertise.

The addition of Tenet will enhance HPG's ability to drive sustained supply cost savings for its membership.

In closing, I'm very pleased with the consistent execution by our clinical and operations teams to deliver high quality patient outcomes and volume growth.

Patient safety, quality of care, and patient experience are key components of our patient centric model as we look to strengthen our delivery system capabilities and broaden our access points in our markets.

We believe this will continue to position us well in delivering value for all stakeholders.

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

Thank you, Milton, and good morning, everyone.

As Milton indicated, we had a good quarter driven by strong volume growth and solid expense management.

I'll provide more detail on our performance and our health reform trends in the second quarter.

As we reported, in the second quarter, our same-facility admissions increased 4.1% over the prior year and equivalent admissions increased 4.9%.

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

During the second quarter, same-facility Medicare admissions and equivalent admissions increased 2.9% and 3.8%, respectively.

This does include both traditional and managed Medicare.

Managed Medicare admissions increased 11.2% on a same-facility basis and now represent 32.7% of our total Medicare admissions.

Same-facility Medicaid admissions and equivalent admissions increased 5.1% and 7.9%, respectively, in the quarter, fairly consistent with recent trends.

We continue to see strength in our six expansion states, but also see strength in our non-expansion states as well.

I will provide additional comments on Medicaid in my health reform remarks.

Same-facility self-pay and charity admissions increased 8.7% in the quarter.

These represent 7.1% of our total admissions compared to 6.8% in the second quarter of last year.

This is a change of trend from recent quarters.

However, let me remind everyone that last year's second quarter, we had a bit of movement between our uninsured and pending Medicaid numbers as states were slowed by the volume of applications in the early period of expansion.

As we talked about before, I believe it's more meaningful to look at these trends over a longer period.

Year to date, our same-facility uninsured admissions are down 2.4% from same period last year.

Managed care and other, which includes exchange admissions, increased 4.3% and equivalent admissions increased 4.7% on a same-facility basis in the second quarter compared to the prior year.

Same-facility emergency room visits increased 7.4% in the quarter compared to the prior year, and same-facility self-pay and charity ER visits represent 19.3% of our total ER visits in the quarter, compared to 20.6% last year.

Intensity of service, or acuity, moderately increased in the quarter, with our same-facility case mix increasing 0.7% compared to prior year period.

Same-facility surgeries increased 1.4% in the quarter, with same-facility inpatient surgeries increasing 2%, and outpatient surgeries increasing 1% from the prior year.

Same-facility revenue per equivalent admission increased 2.8% after excluding from second-quarter 2014 revenues, $142 million Texas labor adjustment we recognized in the second quarter last year.

Our international division reduced our reported revenue per equivalent admission by approximately 40 basis points, principally due to currency conversion rates, which is similar to what we saw in the first quarter.

Same-facility managed care and other, which includes exchange revenue per equivalent admission, increased 4.6% in the quarter.

Same-facility charity care and uninsured discounts increased $269 million in the quarter compared to the prior year.

Same-facility charity care discounts totaled $884 million, a decline of $13 million from the prior year period, while same facility uninsured discounts totaled $2.415 billion, or an increase of $282 million over the prior-year period.

Now turning to expenses, our expense management in the quarter will begin very strong.

Same-facility operating expense per equivalent admission increased 2.5% compared to the last year's second quarter.

Our consolidated adjusted EBITDA margins, adjusted for the share-based compensation, high tech revenue and prior labor adjustment, was up 20 basis points in the second quarter, and year to date is up 100 basis points from the prior year when adjusted for these items.

Same-facility salaries per equivalent admission increase 2.9% compared to the last year's second quarter.

Salaries were down just as a percent of revenue increased 30 basis points, compared to the second quarter of 2014, when you exclude the $142 million labor adjustment from prior-year revenues.

Same-facility supply expense per equivalent admission increased 3.2% from the second quarter, compared to the prior-year period.

I believe a part of this reflects our growth in surgical volumes, along with some isolated pressures in pharmaceuticals and some commodity items in the quarter.

Other operating expenses improved 10 basis points from last year's second quarter to 17.7% of revenues, and we did recognize $18 million in electronic health record income, compared to $35 million in the last year's second quarter, consistent with our expectations.

Let me touch briefly on cash flows.

We had another strong quarter, with cash flows from operations totaling $1.057 billion.

Year to date, cash flows from operations were $2.75 billion, or a 22.6% increase from prior year.

At the end of the quarter, we had approximately $2.627 billion available under our revolving credit facilities, and debt to adjusted EBITDA of 3.84 times at June 30, 2015, compared to 3.96 times at December 31, 2014.

Let me touch briefly on healthcare reform.

Health reform activity was strong for the quarter.

In the second quarter, we saw approximately 11,600 same-facility exchange admissions, as compared to the 5,600 we saw in the second quarter of last year.

You'll recall we saw about 9,800 exchange admissions in the first quarter for an 18% increase quarter to quarter, and we believe this is largely due to the continuing enrollment.

We saw approximately 44,700 same-facility exchange ER visits in the second quarter, compared to 19,400 in the second quarter of 2014, and 36,900 in the first quarter of 2015.

We have history on about 45% of our second-quarter HICs volume, and based on our look back at previous coverage, we still estimate about 40% of these admissions were uninsured prior to health reform.

In our six expansion states, same-facility uninsured admissions were up 1.4%, compared to second quarter of 2014 and medicaid admissions, were up 16% for the quarter.

But on a year-to-date basis, in our expansion states, uninsured admissions are down 39%, and Medicaid admissions are up 22.9%.

When we roll all the components of health reform that we could track, we currently estimate health reform contributed to just under 6% of our adjusted EBITDA for the quarter and the overall benefit is in line with our expectations.

That concludes my remarks.

I'll turn the call over to Sam for some additional comments.

Good morning.

As mentioned earlier, volume growth was strong in the second quarter with no unusual factors contributing to the quarter's growth.

As I've stated on previous earnings calls, we believe this performance continues to reflect improving macroeconomic trend in many of our markets and market share gains for the Company.

We believe the market share gains have been driven by a combination of solid execution of our growth agenda and capital spending that has been invested, both to increased access to our network and to add operational capacity.

Our growth and volume is once again broad based across most of the Company's markets and 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 three divisions had growth in managed care and exchange admissions, and all but one of our divisions had growth in adjusted admissions for these same player classes.

Managed care and exchange emergency room visits grew by 8%.

All but one division had growth in emergency room visits for these payer classes.

All but three divisions had growth in inpatient surgeries.

Surgical admissions accounted for 27.1% of total admissions for the quarter, down slightly from 27.7% in the second quarter of the previous year.

This quarter is the ninth straight quarter with growth in inpatient surgeries.

Nine divisions had growth in hospital-based outpatient surgeries which were up 0.9% for the Company.

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

Surgeries grew 1.1% in our ambulatory surgery division.

We believe that many components of our OR of choice initiative that are working inside of our hospitals are now contributing to our growth in this division.

Additionally, we recently acquired four new surgery centers in existing markets inside of our ambulatory surgery division.

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

Other categories of our inpatient business were strong also.

Deliveries for the quarter were up 2.4%.

Managed care and exchanged deliveries were up 7.3%.

Neonatal admissions grew 4.6%.

The Hazel health admissions were up 7.2%.

Rehab admissions were up 9.9%.

And average length of stay grew 1.7%, reflecting the higher case mix and acuities of our admissions.

On a same-facility, basis after excluding the Texas Medicaid labor revenue adjustment from last year, inpatient revenue for the Company grew 5.8%.

Outpatient revenue for the Company grew 12.5% in the quarter on a consolidated basis and represented 39.9% of total patient revenues.

On a same-facility basis, outpatient revenue grew by 9%.

Market share trends for the Company's inpatient business for the 12-month period ended December 2014, were generally consistent with past trends.

Our market share grew by 22 basis points.

As a result, the Company's composite market share is around 24.5%.

Approximately 68% of our markets increased share across most service line categories.

Overall inpatient demand across HCA markets continued to show sequential strength.

Demand growth accelerated in our markets in each of the last three quarters of 2014, with the fourth quarter showing growth of 3.5%.

Commercial demand in HCA markets was even more notable for the year, with an increase of over 4% with sequential acceleration in each quarter.

We believe inpatient demand in both the first and second quarters 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 invest in our local networks at significant levels.

The anticipated increase in capital spending, that we announced last quarter will provide, over the next few years, more capital in our markets to add inpatient bed capacity, increased emergency room capacity, enhanced service line offerings, and add equipment for our nurses and for our physicians.

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

Finally, managed care and exchanged contracting continued to progress as planned.

The Company is currently contracted for almost 96% of its revenue for 2015, 67% of its revenue for 2016, and 45% of its revenue for 2017.

The pricing and the non-pricing terms are generally consistent with the contracts we've renewed over the past couple of years.

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

Thank you, Sam.

Tracy, if you could come back on and we'll start taking questions.

As we always do, I encourage each of you to hold your questions to one at a time and give everybody a chance to ask their question.

Tracy?

Thank you.

(Operator Instructions)

We'll go first to A.J. Rice from UBS.

Thanks, hi, everybody.

I'm going to slip in a technical question and then ask a broader one.

The technical question is, if you've got this Texas Medicaid waiver money come in, is it, in your mind, too small to bother to raise the guidance?

Or why aren't you raising the guidance for the back half of the year as you're offset?

The broader question is that one I got on the pre-announcement from the number of people.

How do we think about the pull through on your volumes?

When you've got the volume strength that you had, some quarters it really seems to leverage down the income statement and other quarters maybe the leverage is less than what we thought?

I don't know whether that's because you make investments with some of the up side that you have, whether there's some stair step to the staffing requirements.

I wanted to conceptually think about that question of how do we think about volume leverage making its way down the income statement from quarter-to-quarter.

A.J., I hate to let the first guy cheat but we will let you -- we'll do two.

The technical question on the waiver and guidance Bill will address and then Sam will talk about pull through.

Hey, A.J., let me talk a little bit about the waiver and your question regarding adjusting our guidance on there.

We did make an adjustment in the second quarter 2015 based on some updated information from CMS on our labor program.

We recognized an estimated increase about $17 million related to the program in the second quarter.

Based on the program updates, as we mentioned, we now believe the labor revenues to be recognized in 2015 will be materially equivalent to the amounts we recognized in 2014 which excludes the impact of $142 settlement we recorded last year.

You're right, our original guidance didn't include an anticipated $70 million reductions, which we no longer anticipate this reduction.

Roughly half of this, we've already recognized in our year-to-date performance between the first and second quarter and the rest coming through the second half.

So the remaining amount, that $35 million or so, we didn't deem to be material by itself to cause us to raise guidance again, but it does contribute there to our belief that it would be near the high end of the guidance.

Sam, I'll let you take the second part.

Let me start off this way, AJ.

First, our margin in the second quarter was well ahead of our internal plan, I'll tell you that.

The second point I want to make is our margin in the second quarter compared to the first quarter and the fourth quarter, which is truly the run rate of the Company, zero change, almost identical margins for the Company in each of those three consecutive quarters.

When I look at our operating expense per adjusted admission, it's hardly unchanged from fourth quarter to first quarter to second quarter and the volumes are very, very comparable.

The other thing is we did have some margin expansion on the second quarter on a year-over-year basis of 20 basis points.

It was not as high as the first quarter, which was uniquely high with our clearance overall.

The differences between the second quarter and the first quarter, although thought incredibly material on each front but somewhat material, and I think contributed to the differences between the second-quarter clearance and the first-quarter clearance is the volume in the second quarter wasn't as strong, it was strong, ahead of plan.

But not as strong as the first quarter so there's some lost leverage comparing those two.

The second big macro point is the reform benefit for the Company second quarter over second quarter of last year was not as material as first quarter over first quarter of last year.

Bill can give you the specifics on that if we need to.

Then at a micro level, I'll tell you there were a few pressure points for the Company on some labor costs due to the fact that we had more vacancies in the first quarter because our volumes picked up a little bit more than we anticipated.

And we filled some of those in the latter part of the first quarter and that carried into the second quarter.

The other thing I would say is the Company's initiatives that are laid out in our guidance for 2015 ramped up a little bit more in the second quarter than they did in the first quarter, so that had a modest impact.

Then the third point is we are seeing some acceleration in drug costs, which have been in the press, it's been in the political arena and so forth.

We're feeling that in our pharmaceutical cost trend somewhat and that put some pressure on our margin in the second quarter.

I'll tell you this.

The Company is focused on margin enhancements like it always has been.

We're continually trying to find ways to leverage the scale of the organization, use our technology and our data more effectively to identify efficiency opportunities and improvement opportunities.

And we continue to believe as we ramp up volume growth, we'll be able to leverage the operating cost of the Company and create margin expansion.

And then when you couple that with our growth initiatives, which are centered on high margin children's expansion, high margin investments.

We think the combination of those things will continue to put the Company in a very solid position with this operating margin.

Thank you, AJ, appreciate it.

Move on to the next question.

We'll go next to Sheryl Skolnick from Mizuho Securities.

Good morning.

Thank you very much.

This is really an outstanding performance and it's really, in my opinion, a shame that the market is not giving you a little more credit for it especially in view of the volume performance we've seen from everyone else, but that's not a question and this is.

Can you focus a little bit, please, on the increase in the bad debt number?

Was that related to what you saw in self-pay and/or was it related to some consideration of balance after?

Do you think this sort of thing is something we should model in as sustainable?

Sorry to (multiple speakers).

Thanks, Sheryl.

Bill will address that.

Good morning, Sheryl.

Let me try to cover that.

It's a good question.

Let me touch on uninsured volume trends and relate that into bad debts and uncompensated care, because there are a couple of things that we should point out here.

Overall, the second-quarter year-over trends a little bit artificially affected by the pending Medicaid activity we saw in our expansion states last year.

As you recall, we had quite a bit of movement going on in both our uninsured and Medicaid categories in the second quarter, where the pending Medicaid in the first quarter of last year that got cleared out in the second quarter, which lowered your uninsured trends when you look at the second quarter alone.

Let me look at uninsured volumes on a year-to-date basis first, just to account for that early period of reform.

Year-to-date basis, and I mentioned on the comments, our uninsured admissions are down 2.4%.

We finished full year 2014 down just over 9%.

So the slowing of uninsured declines is, we believe, largely attributable to the fact we didn't really have any new states other than Indiana expand Medicaid.

So the year-over-year trends are beginning to normalize and sunset on us.

And by the way, it's pretty much in line with our expectations and what we're seeing in other areas of our volume.

Relative to bad debts, as we've talked about before, I think people understand we have a pretty robust charity and uninsured discount policy.

So we think it's best to look at uncompensated care in total, because if any quarter, there can be some movement between bad debt, charity, and uninsured discounts.

You saw that in the second quarter because of some of these payer class movements.

Our uncompensated care as a percentage of revenue, adjusted for the uncompensated care, was 30.7% in Q2 of 2015.

It was 29.0% in 2014, so some slight growth, but it was 30.3% in Q4 of 2014 and 29.6% in Q1.

It's a manage manageable level of growth.

On the year-to-date basis, our uncompensated care is 30.1% versus 30.3% as a percentage of revenue.

So there's still some improvement on the year-to-date, but we do believe some of the trends are beginning to sunset on us as we see the -- not as much left on year over year of reform.

You do continue to see some growth in deductibles and co-pay amounts.

You mention this balance after the bill.

We feel we've got really strong collection practices.

Our collections per account are staying really consistent with where it's historically been, but we seeing a little bit higher per account liability, and that tends to affect that slightly.

Overall, I think we feel strong about what our collection practices are.

Sheryl, thank you.

We'll go next to Brian Tanquilut from Jefferies.

Just to follow up on the comment, Bill, and this is probably broader.

As we think about healthcare reform, it sounds like this tailwind from the recent -- the implementation of the law is starting to taper off.

As we look out two to three years, we've heard a lot of investors ask about the air pocket that we could potentially see in 2017, whether it's the Cadillac tax changes and all that.

How do you guys see healthcare reform playing out and just your outlook, without going into guidance, over the next three years?

Let me start and maybe Milt add in.

I kind of see, on a year-over-year basis, the enrollment for this year is really what's driving the growth.

With the increased enrollment, we are seeing increased reform activity.

I think as we saw last year, we saw that level off in second and third quarter then it picked up again with first quarter with the new enrollment.

I think this year, within the year, they might begin to see some leveling off, but I think next year's performance would largely be attributable to the enrollment that we might see.

We do think there's some kind of key points of the law that may incentivize people to find enrollment, so I do think there will continue to be some tail winds in reform, at least for next year.

Not so sure longer-term I have a visibility into that.

Milt, do you want to add --

Let me just reinforce, maybe, and then add something, but reinforce Bill's comments around last year, we had some movement from pending Medicaid in to -- out of uninsured.

Really, you look at the numbers on a year-to-date basis, we have said that last year in the second quarter our comments, and I'll just reinforce them I think that's important.

I don't want to get too alarmed about the particular second-quarter growth in uninsured admissions because of that comp to last year.

Also I'll say -- so think about reform going forward.

I do think we'll continue to see continued growth in enrollment next year with reform.

The CDL, of course, projects that as well.

I think you'll see more material -- that the penalty tax will materially increase next year for those who choose not to seek health insurance coverage and that may drive more enrollment.

And then you're going to see employers with as few as 50 employees having to provide health insurance to their employees to avoid a penalty at the employer level.

There's still some implementation pieces of reform that we've yet to see.

So I want just to reinforce that out in to the market and not react too much to this second quarter because of the comp situation we had last year.

Thank you, Brian.

Next question?

We'll go next to Frank Morgan from RBC Capital.

Good morning.

As I looked at your cash flow, strong cash flow trends so far year-to-date, it looks like you beat -- or actually got a little bit ahead of your full-year trend on run rate.

I was wondering if there's anything we should be considering what might happen in the second half of the year, because I think typically that is your stronger part of the year?

Thanks.

Bill, do you want to address that?

I think we're still projecting our cash flow from operations to be somewhere between $4 billion and $4.250 billion for full year.

I think we feel pretty good about that number, if you look at year-to-date, as I said, $2.075 billion.

So that does apply a little bit of growth in the second half of the year.

As you said, last year second half of the year was really strong as we saw the core growth (inaudible) continue to prosper.

There's really no reason to think that shouldn't continue for the second half of this year.

Thank you, Frank.

We'll go next to Matt Borsch from Goldman Sachs.

Wanted to ask, if I could, on the surgeries.

You mentioned inpatient surgeries growing faster than outpatient.

That's not the normal trend and I'm wondering if you could comment on that, if you suspect that will continue?

Matt, thank you.

Sam, do you want that one?

Speaking to the volume growth inside of HCA, I think your point about overall demand for outpatient surgery outpacing inpatient demand is probably an accurate statement.

We don't get great information with respect to market share data for outpatient surgery, so it's difficult for us to assess our overall performance there.

It's clear in a lot of our markets there is more suppliers of outpatient surgery than there are inpatient surgery.

So that could be part of the dynamics we are seeing as an organization.

We have, though, changed the trend curve for HCA on outpatient surgeries over the past two or three years with our surgical growth initiative and our OR choice efforts.

We've turned the trend line positive in the face of significant competition.

I think your statement is right about demand for outpatient surgery.

But for HCA, though, I will say a number of our service line initiatives that are intended to drive more acuity, more complexity and round out the offerings within our market will be tenored on certain service lines that had a lot of inpatient surgeries.

For example, trauma, cardiovascular, oncology, just to name a few, have a very significant inpatient surgical component, which is a very high margin service line for the Company and a very significant service line with respect to rounding out the depth of our service line offering.

That's part of what's going on in our metrics as well.

Thanks, Matt.

We'll go next to Joshua Raskin from Barclays.

Thanks.

I appreciate you taking the call.

It seems like there's been a lot going on in hospital land with spin-offs and real estate sales and other M&A and seeing HCA clearly focused on capital expenditures.

You guys increased your guidance for CapEx last quarter.

I'm curious, could you help us understand better what the projects are that you guys are investing in?

You're spending more than all of your peers combined.

And how do you estimate the returns on those capital expenditures?

Sam, you want to start with that one?

I think the first thing I would say, the Company has incredible cash flow, that it has remarkable optionality with being able to use that.

When you think about capital expenditures, and you think about the core growth agenda of the Company, which is centered around organic growth within the existing market, it creates the need for capital investment.

From that standpoint, we have studied our growth trajectory, we've studied our capacity constraint and we've studied our opportunities, if you will, with our strategy.

And we felt that the increase in capital expenditures was needed to really resource that particular component of our business in a very significant way.

You've seen it over the last five years incrementally increase our capital investments as we've come out of the LDL and in to the public market as our volume improved, as the market share improved, as the economy has improved.

So that's been a driver for us.

With respect to the component of that, as I've said on my comments and I've said in previous quarter's comments, inpatient capacity, outpatient capacity, technology that's needed for our nurses and physicians, and then new facilities are really where we're spending our money, which makes sense.

That's what we are when it comes to an organic growth oriented Company.

That's where the capital expenditures are going.

Milt or Bill, I don't know if you want to speak to the other components of what's going on in the industry.

Let me say first of all, you talked about some of the returns.

We have, I think, a very sophisticated and effective process to evaluate our capital projects.

We give them -- we put them through a really solid process to evaluate the opportunities.

As a management team, the thing Sam just talked about, we approve as a team Bill and Sam and myself and others, we evaluate these projects.

I can tell you we just approved a batch in the second quarter of about $550 million of expenditures that all of us went through and personally, I think they're great investments.

If you look at the returns, I think the average net present value return on that package of improvements is probably somewhere around two so very strong return opportunity.

If you look at the Company's return on invested capital, I don't have it as of June 30, but as of March 15, for the last 12 month ended March 15, our return on debt to capital is 16.1%.

I can tell you at the end of 2014 it was 15.2% and the end of 2013 it was 13.9%.

So we're seeing increasing returns on our invested capital.

If you know this Company, we have been an organic growth company now for the past nine years, basically.

So we think about the Company going private in 2006, we had $4.5 billion, roughly, of EBITDA and again, basically the same assets today nine years later.

And if we hit our guidance near the top end of the range of $7.85 billion, you can see solid growth in earnings through that time.

I think our processes are effective.

I think we have great investment opportunities.

We are pursuing those and I think our returns, especially the recent returns over the last few years, demonstrate that the process is working.

Thank you, Josh.

We'll go next to Whit Mayo from Robert Baird.

Thanks.

I'd be curious if you could talk a little bit about the exchange volumes you're seeing and maybe specifically anything notable in certain geographies, like Florida, that may be perhaps stronger than others.

We're seeing some of the rehab companies and anesthesiology providers talking about seeing these newly covered patients kind of come through the delivery system.

Just wondering if there's any observation on service lines, access points?

Is it still mostly outpatient?

That would be helpful.

I'm going to let Bill take that, and I don't know if Sam will have anything to add.

Let me start on that.

A couple quick points on the observations.

I don't have any on service mix, but geographically, I can tell you Florida is our strongest exchange volume state.

When we looked at the pockets in Florida and I look at the year-over-year growth, Florida is our highest state in terms of growth of exchanges.

That's both in South Florida as well as the West Coast and spread along even the Panhandle.

And we think if we see reports of enrollment in those states, and I think the percentage of the population enrolled in Florida is the highest in the country, so with our footprint I think it leads that onto that.

Texas is having great exchange in reform volume growth as well, probably just a hair below Florida.

So our two largest states are showing the largest reform growth and we think that's positive on there.

I will tell you our reform trends, as I alluded to briefly earlier, are starting to level out, March, April, May, June, I look at the monthly numbers.

We may have found our level for 2016 on there.

As I look at our two largest states, fortunately they're the two largest states with our highest year-over-year reform.

I don't have any updated -- at my fingertips on our mix and intensity.

We mentioned last year that our reform business was carrying a little bit higher intensity.

That's generally because of the lower OB volume that is contained in that population and compared to kind of our commercial population as a whole.

My belief is that's continuing on so it's carrying a little bit more activity.

Sam, do you have any more commentary on that?

I think we're in good position contract-wise, and feel very good about position from a network configuration perspective as well.

I think the general statement is, Whit, the exchange is comparable to the commercial business with the exception of obstetrics being slightly lower as Bill indicated.

Thus, the case mix is slightly greater.

That's the short story on the exchange business as compared to the commercial business.

Whit, thank you.

We'll go next to Kevin Fischbeck from Bank of America.

This is actually Joanna Gajuk filling in for Kevin.

Coming back to the prior discussion around CapEx and your growth plan, because even after (inaudible) we're just trying to think about the uses for your free cash flow after you spend the money to grow internally.

Any color you might give for how you're going to out take (inaudible)?

Joanna, thank you.

Milton, you want that one?

Sure.

It's really a capital allocation question and we've been pretty consistent saying that with our free cash flow, we look first for acquisition opportunities.

It's difficult to project when those will come and how they may or may not materialize.

Following that, obviously investing -- I should say, first investing back in our markets, which we're doing, and then acquisition opportunities.

Then we've been a consistent buyer of our stock through share repurchase now for quite a while.

As you heard me say in my comments, this year we have already spent $940 million on share repurchase from our February authorization.

And again, we have another little bit more than $1 billion remaining on our May 2015 authorization.

So a pretty consistent using cash deployed back into the market to acquire shares, and again, quite a bit of powder available to us currently.

All right.

Thank you.

Next question.

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

Thanks.

Good morning.

Any impact worth highlighting related to the Florida lift standards and related Medicare provider rate increase in that state?

Related to that, now that you expect to receive the Texas supplemental payments, should we think those payments are likely sustainable in two, three, four years or will they be debating revenues every year going forward?

(Multiple speakers ) Really no change in our Florida lift program other than your discussion about that program being reduced or eliminated and we've avoided that.

So we think year-over-year we're solid on terms of Florida lift.

On the Texas waiver, I think you may know that, that labor period goes through 9/30/16.

We're in the first fiscal year of that and got one more year on that.

What happens beyond that labor program, can't really predict.

We know it's hugely important to the providers in the state so we're hopeful they'll be some renewal application of the state with CMS.

And we'll see how that gets renewed and at what form after the current labor period expires.

Again, we're good through 9/30/16 with that program.

Andrew, I think you mentioned the CMS rates as (inaudible) came in pretty much as expected, so flattish to moderate if you look at our total books of business in Medicare for next year.

Next question.

We'll go to Gary Lieberman from Wells Fargo.

Good morning.

Thanks for taking the question.

You guys have pretty consistently talked about the strength in the economy as being a major driver along with the Affordable Care Act.

Some other companies have sort of backed away from being able to differentiate between the benefit from the economy versus healthcare reform.

Can you walk us through your analysis and how you're comfortable that it still is a big driver from the economy and that it's not more health care reform?

Gary, Sam, Bill, which one of you want to start with that one?

Let me start and maybe add.

On the reform piece, I agree.

I think over time it will become more and more difficult to distinguish the amount that's material reform versus kind of the core business.

Today, we're still using tracking what's going on within the health insurance exchanges and our ability to track that specific volume and that specific population.

And making some estimates of its impact to the Company relative to kind of the pre-reform era.

I do believe as time goes by, (inaudible) it's going to be more and more difficult to attribute the specific amount to reform versus other aspects, whether or not the economy and our overall core strategies being executed.

But for now our reform is being isolated for our health insurance exchange activity.

I think, Gary, from my standpoint, we look at the HCA portfolio of markets as routine to understand what's the job growth trends, what's the unemployment trends, what's the overall GDP, if you will, of each of HCA's markets and what we see and what we understand is a very significant improvement in overall macroeconomic factors within each of our markets.

It's hard for me to process that the exchange, running around 2% of our total business versus the commercial around 28% to 30% of our total business, that the exchange is driving the overall performance.

It's not big enough yet.

So we believe San Jose, California; Austin, Texas; Dallas, Texas; Miami, Florida; Nashville, Tennessee; these markets are growing and we're seeing an overall commercial demand which is significantly outpacing the ability of the exchange component of our business to drive activity.

So those are some of the ways we triangulate into understanding how the economy is having an impact.

So that's how we judge it and we believe that to be the case and we're optimistic that a number of these markets are going to continue to have very strong economic activities in the foreseeable future.

Gary, thank you.

Next question.

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

Thanks.

Good morning.

You talk about your contracts and what percentage is in place and so on by segments.

Can you give us any color on trends and how that's looking up or down in terms of your negotiations with Tenet for commercial, Medicaid, and Medicare?

And any differences you might be seeing on Medicare payers versus commercial?

Is this considering as rate increases are (inaudible) are getting a lot of pushback for the exchange population from the commercial side?

And then finally on M&A, all the M&A activity and the payer mix, do you see your inorganic strategy moving away from maybe market entry into more to shoring up your share in existing markets?

We'll do managed care contracting, what we're seeing there and then we'll step back and look at -- (multiple speakers)

This is Sam.

There's absolutely no change in our managed care contracting trends as compared to the previous two years or so.

Our inflationary adjustment in our commercial contracts are consistent with past trends in the [4% o 5% zone] of those arraignments.

On the governmental side of our contracting, Medicare Advantage and Medicaid products generally consistent with the state and the federal government's change in overall payment rates there.

The non-pricing terms, as I mentioned in my comments, are fundamentally the same for the most part.

There's a few pay for performance divisions we've added here and there to round out our capabilities inside of those contracts, but those are not really inconsistent with past practices.

Bill, do you want to address the M&A activity?

In the managed care space, yes.

First, we need to review the outcome of the DOJ review from an antitrust standpoint.

That could very well affect certain market positions and our analysis would be a market-by-market approach to understand the ACA impact.

Without having that information, we really can't address the ACA impact.

Second, in many of our markets, one of the largest payers are in a fairly tight band today, which of course, would minimize any short-term impacts.

Then a third, I'll remind you that with respect to HCA, our market position and market share in most of our markets either -- they are number one or number two in share in most of our markets and puts us in a good position to be relevant to all the payers going forward.

So my concern over the longer-term is how this consolidation, or possible consolidation, affect smaller providers or systems in market that may only operate in one or two markets.

To your question about shoring up our share, we look to do that.

We're trying to be optimistic to do that.

The question I would have is could this consolidation be a catalyst for further provider consolidation.

That's yet to be known.

We'll see how that plays out.

But it could be a catalyst to cause more -- to give us more opportunity for consolidation in the provider space.

Thank you, Ana.

Another question?

(Operator instructions)

We'll go next to Dana Nentin from Deutsche Bank.

Thanks for taking the call.

Just going back to (technical difficulty) volumes, you saw some nice strength in areas like behavioral and rehab.

Anything specific that's driving that strength, whether it be a function of some of your recent investments?

Any color you could provide there?

Sam, you want to take that one?

We have had, over the past number of years, a fairly aggressive effort in both of these service lines to develop capabilities in each of our markets.

Both service lines are very complimentary to core service lines within HCA.

For example, behavioral health is very complimentary to our emergency services line.

Rehab is very complimentary to our orthopedics and neural sciences.

We've been very aggressive over the past number of years in number one, creating capacity and capability within these two service lines.

And then the second thing we've been able to do is internalize the patient, if you will, inside the HCA network and keep them in the system when they needed those particular service lines.

That has yielded a great deal of growth for us.

We've had remarkable sustained growth in both service lines.

We still believe we have opportunities in a number of our markets to make larger investments in each of these service lines by adding more capacity, taking advantage of the demand for these two service lines.

And then creating opportunities to capture more share of patients who hit our system and don't get these particular services within HCA network.

So we're very bullish in both of these service lines.

Dana, thank you.

Best I can tell, there's no one left in the queue.

I want to thank everyone for being on the call.

Appreciate it, and look forward to seeing you all soon.

This does conclude today's conference.

We thank you for your participation.

You may now disconnect.