美國醫院公司 (HCA) 2016 Q1 法說會逐字稿

Welcome to the HCA first-quarter 2016 earnings conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Senior Vice President, Mr. Vic Campbell.

Please go ahead, sir.

All right, thank you, Stephanie, and good morning to everyone.

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

Here this morning, with me, is our Chairman and CEO, Milton Johnson; Sam Hazen, our Chief Operating Officer; and Bill Rutherford, our 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 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 undue reliance on these statements.

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

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 claim costs, 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 first-quarter earnings release that came out this morning.

This call is being recorded.

A replay is available later today.

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

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

This morning we issued our first-quarter 2016 earnings release highlighting the financial operational performance of the Company.

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

We are pleased with results in the first quarter which are in line with our internal expectations.

Adjusted EBITDA of $2.003 billion for the first quarter, increased 2.1% over the prior year.

As expected, the first quarter of this year was a difficult comparison to the first quarter of 2015, when adjusted EBITDA grew 19.3% over the first quarter of 2014.

Net income attributable to HCA Holdings Inc.

increased 17.3% and earnings per share increased 24.3% for the quarter.

As noted in our release this morning, net income, EPS and cash flows from operations were favorably impacted by an accounting change we adopted related to share-based compensation, which lowered our tax rate for the quarter.

Our 2016 guidance remains unchanged, except for adjusted EPS, which has been increased by $0.20 per diluted share on both the low and the high end of the range.

This is to reflect the tax benefit recorded during the first quarter of 2016 related to the accounting change made in the first quarter.

We have not attempted to estimate the impacts of this accounting change on future quarters of 2016, as the tax benefit depends upon the number of equity awards settled each period and the market value of our stock at the time of settlement.

We continue to experience solid growth in inpatient and outpatient volumes, as well as surgical and emergency room visits.

We believe these results speak to the quality of our markets and the execution of our strategic agenda.

Same-facility admissions increased 1.6% while same-facility equivalent admissions increased 3.1%.

Our growth drivers include capital improvements, programmatic developments within our service lines, end-market access point development and strategic acquisitions.

This year, we plan to invest $2.7 billion to expand our service capabilities and capacities in our markets.

In 2016, approximately 350 new inpatient beds and 100 new ER beds will come online, with another 550 inpatient beds and 200 ER beds scheduled for completion in 2017.

We continue to see solid growth from our investments in the service-line development such as trauma, cardiology and related services.

Our strategy to expand our access points in our markets is providing growth opportunities for inpatient and outpatient services.

The effective execution of our growth agenda is yielding market share gains and Sam will provide additional details in a moment.

With respect to supply expense, we continue to see solid execution of our initiatives to manage our supply costs.

We are pleased with the early results of our integration of Tenet Healthcare into the HealthTrust purchasing group.

And clearly, one of the highlights of the quarter is the strong growth in cash flows from operations, up 37.4% over last year's first quarter.

The quarter reflects our balanced approach to capital allocation.

During the quarter, we generated almost $1.4 billion in cash flows from operations and we deployed $509 million of capital expenditures and $621 million to repurchase 8.921 million shares of our stock.

And we had [$1.983] billion remaining on our $3 billion share repurchase authorization at the end of the quarter.

Finally, let me recognize Don Stennett, HCA Senior Vice President and Controller who retired at the end of April.

We thank Don for his 17 years of service and his many contributions he's made to our Company.

I would also like to welcome Chris Wyatt, who has succeeded Don as Senior Vice President and Controller.

Chris most recently served as Vice President and Chief Financial Officer of HCA's Information Technology and Services organization.

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

Good morning, everyone.

As Milton indicated, we had a solid quarter that was driven by good volume growth and our adjusted EBITDA results were in line with our expectations.

Let me give you some more detail on our performance and the results for the quarter.

As we reported, in the first quarter, our same-facility admissions decreased 1.6% over the prior year and same-facility equivalent admissions increased 3.1%.

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

During the first quarter, same-facility Medicare admissions and equivalent admissions increased 0.8% and 2.1% respectively.

This includes both traditional and managed Medicare.

Managed Medicare admissions increased 3.1% on a same facility basis and now represent 33% of our total Medicare admissions.

Same-facility Medicaid admissions and equivalent admissions increased 1.4% and 4.3% respectively in the quarter, in line with our recent trends.

Same-facility self-pay and charity admissions increased 10.6% in the quarter, while equivalent admissions increased 9.4%.

These represent 6.9% of our total admissions compared to 6.3% last year.

There are a couple of points on our uninsured volume I would like to call out.

First, our uninsured same-facility admissions in our expansion states were flat year over year, while our non-expansion states grew just over 11%.

Texas and Florida represent about 70% of our total uninsured admissions and represent 90% of the year-over-year growth.

And to put this uninsured growth into perspective, the 10.6% growth we saw in the quarter equates to just over 3,000 admissions for the Company, compared to the 477,000 same-facility admissions we had for the quarter.

Managed care and other which includes exchange admissions increased 1.5% and equivalent admissions increased 2.7% on a same-facility basis in the first quarter compared to the prior year.

Same-facility emergency room visits increased 6.9% in the quarter compared to the prior year.

Same-facility self-pay and charity ER visits represent 18.6% of our total ER visits in the first quarter for both 2016 and 2015.

Intensity of service, or acuity, increased in the quarter with our same-facility case mix increasing 2.7% compared to the prior-year period.

Same-facility surgeries increased 3.3% in the quarter, with inpatient surgeries increasing 1.4% and outpatient surgeries increasing 4.4% from the prior year.

Same facility revenue per equivalent admission increased 2.2% in the quarter.

Our outpatient revenues in the first quarter continued to show very strong growth.

Outpatient revenues in the quarter represented 38.9% of total revenues, up 120 basis points from prior year's first quarter.

Same-facility managed care and other revenue per equivalent admission increased 5.9% in the quarter.

Same-facility charity care and uninsured discounts increased $618 million in the quarter compared to the prior year.

Same-facility charity care discounts totaled $951 million in the quarter, an increase of $63 million from the prior-year period, while same-facility uninsured discounts totaled $3.076 billion, an increase of $555 million over the prior-year period.

Now, turning to expenses.

Same facility operating expense per equivalent admission increased 2.8% compared to last year's first quarter.

On a consolidated basis, salaries and benefits, as a percentage of revenue, was 45.8% compared to 45.5% in last year's first quarter and 45.7% for the full year of 2015.

Salaries per equivalent admission increased 2.8% in the quarter on a same-facility basis.

Productivity, as measured by same-facility man-hours per adjusted admission, improved 0.5% and same-facility wage rates increased 2.5% in the quarter.

Supply expense, as a percent of revenues, were 16.7% this quarter, as compared to 16.9% in last year's first quarter on a consolidated basis.

Same-facility supply expense per equivalent admission increased 1.4% for the first quarter compared to the prior year period, reflecting continued success on several supply-chain admissions.

Other operating expenses increased 40 basis points from last year's first quarter to 18.1% of revenues and was consistent with the 18% we ran in Q4 of 2015 and 18.2% in Q3 of 2015.

We recognized $4 million of electronic health record income in the quarter compared to $19 million last year, consistent with our expectations.

Let me briefly touch on cash flow.

As Milton mentioned, we had another extremely strong quarter with cash flow from operations just under $1.4 billion, about a $380 million improvement.

Cash flow from operations was benefited by $74 million due to the adoption of new accounting standards that I'll discuss in a minute.

Free cash flow increased $339 million from $440 million in Q1 of 2015 to $779 million in Q1 of 2016.

At the end of the quarter, we had $2.9 billion available under our revolving credit facilities and debt to adjusted EBITDA was 3.84 times at March 31, 2016, compared to 3.85 times of the end of 2015.

Let me touch briefly on health reforms.

Health-reform activity continued to grow in the quarter.

In the first quarter, we saw approximately 12,500 same-facility exchange admissions as compared to the 9,860 we saw in the first quarter of last year or about a 27% increase.

You may recall we saw about 11,200 same-facility exchange admissions in the fourth quarter of 2015 or an 11% increase sequentially quarter to quarter.

We believe this is largely due to new enrollment.

For perspective, exchange admissions represent about 2.6% of total admissions for the Company.

We saw approximately 50,000 same-facility exchange ER visits in the first quarter, compared to the approximate 37,000 in first quarter of 2015 and 38,000 in the fourth quarter of 2015.

Overall, our exchange and reform activity is in line with our expectations.

Lastly, as mentioned in the release, the Company did elect to early adopt a new accounting standard FASB ASU 2016-09 which was issued in late March.

This standard simplifies certain aspects of accounting for share-based payment transactions.

In summary, the standard requires that excess tax benefits related to equity award settlements will be recorded as a component to the provision for income taxes prospectively versus previously these amounts were recorded directly to equity.

In the quarter, we recorded a $74 million tax benefit for $0.18 per diluted share related to this adoption.

Also, these tax benefits amounts were previously presented as cash flow from financing activities, but are now reflected as cash flows from operating activities.

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

Good morning.

As mentioned earlier, the first quarter was another solid quarter of volume growth for the Company.

The Company continued to show broad-based growth across our markets and broad-based growth across the various service lines that make up our business.

There were a number of factors that impacted our inpatient admissions and outpatient volumes this quarter.

First, flu admissions were down by 40%, which affected our overall inpatient admission growth rate by 0.6%.

And secondly, leap year positively affected our inpatient admissions by approximately 1%, but this calendar effect was partially offset by the Easter holidays, which were in March this year.

We believe the net impact of all these factors had an immaterial effect on overall volumes.

For our domestic operations, on a same-facility basis, 11 of 14 divisions had growth in admissions; 14 of 14 divisions had growth in adjusted admissions; and 13 of 14 divisions had growth in emergency-room visits.

The Company had a total of 56 freestanding emergency rooms at of the end of March.

We had 44 last year at this time.

Freestanding emergency-room visits grew 31% and accounted for approximately one-third of our overall growth in visits.

Hospital-based emergency room visits grew 5%.

This broad-based performance reflects HCA's strong and diversified portfolio of provider networks in 42 domestic markets, most of which we believe still have good growth prospects.

In addition to the strong portfolio performance, the Company's growth across its diversified facility base and service lines was equally strong.

For domestic operations, on a same-facility basis, inpatient surgeries grew by 1.8%, which increased surgical admits to 27.6% of total admits in the quarter, an increase of 100 basis points.

Surgical volumes were particularly strong in cardiovascular, orthopedic and general surgery categories.

Outpatient surgeries grew by 4.6%; both components of this service line, hospital-based and our freestanding ambulatory division, had equally strong growth.

Also, same-facility outpatient, endoscopic and pain procedures grew by 1.6%.

The Company continues strategically to add freestanding ambulatory, endoscopic and pain centers to its provider networks.

As compared to the first quarter of last year, we have acquired or developed nine new centers and closed or sold four for a net of five more, bringing our total to 131 centers.

Including these new centers, the Company's total outpatient surgery volumes grew 6.3% and outpatient endoscopic and pain procedures were up 6.7%.

Behavioral health admissions grew 2.7%; rehab admissions grew 2.8%.

Deliveries were flat in the quarter; however managed deliveries were up 4.4%.

Neonatal admissions grew 4.7%, but our length of stay declined because of less acuity this quarter, which impacted our patient-day growth in this service line.

Overall, average length of stay increased 0.5%, which was driven mainly by the growth in our acuity or case-mix index.

We believe our efforts in developing a more comprehensive and complex level of services across our provider networks are driving this increase.

Other volume statistics for the quarter are as follows, cardiology procedure volumes grew approximately 5%; trauma volumes grew 27%; observation visits were up 13%; and finally, the Company's urgent-care visits in total grew 22%.

The Company had 68 urgent-care centers at the end of March this year, up from 50 last year.

The inpatient market-share data for the 12 months ended September, 2015 shows that HCA continued to gain share and our composite share of 24.6% was at its highest level in the past five years.

We believe our comprehensive growth agenda, which is both well resourced and well executed, provides further opportunities for the Company to increase market share and drive revenue growth.

With that, let me turn the call back to Vic.

Thanks, Sam.

Stephanie, if you'll come back on and poll for questions.

And we would encourage folks to ask only one question so we can get everybody covered.

Thank you.

(Operator Instructions)

Sheryl Skolnick, Mizuho Securities.

So in this quarter, and in previous quarters, as you've experienced increases in uninsured volume, some folks have been focusing on bad debt.

And so, while I hate to ask the question, I have to ask the question, because I know it's on the minds of many.

So the fundamental question is, how worried should we be about the increment that we see in your bad-debt ratio in this quarter; that's number one.

Number two, can you give us an estimate of the impact of the treatment of these patients on the EBITDA performance and whether that might be a reflection of a difference between this year's in-line performance versus last year's strong outperformance?

And third, can you give us a sense of whether or not that increase that you experienced was anticipated by you or whether your gaining market share and adding ERs may have led to a slightly higher-than-anticipated increase in uninsured services?

All right, Sheryl, thank you.

Bill?

You want to take that?

Sheryl, good morning.

Let me try to address most of your points.

When I look at the bad debts, as you know, for HCA I think we have to look at the total uncompensated care picture which includes charity as well as the uninsured discounts.

When I look at our total uncompensated care trends, those trends are pretty consistent with our recent experience.

When I look at it as a percent of adjusted revenue, it was 32% for the quarter, 32.6% in the [fourth] quarter, 33% was a little high in third, 30.7% in the first and 29.6% in the first.

So our trends are pretty consistent and I would tell you, we are pretty much in line with what we have internally projected.

As we've said, I believe the uninsured volume will be driven by our emergency-room volume.

Our emergency-room uninsured ED visits were up 26,000 compared to our 3,000 or so uninsured growth.

You see that's a 12% admit rate which is pretty consistent with what we've historically seen.

And then, as I mentioned in my comments, it is driven by Florida and Texas, obviously two non-expansion states that we continue to see.

So I have anticipated our uninsured trends to kind of settle out around that high single-digit level.

I think it will be really settling where our ED visits land.

The EBITDA impact is really marginal; as we've talked, the EBITDA impact is the marginal costs that we have for that.

So I don't think that really contributed materially to the EBITDA issues for the quarter for the Company.

Sam, did you have anything?

Sheryl, thank you.

Thank you.

A.J. Rice with UBS.

Hi, everybody.

I might just ask one technical question and then a broader question.

Just on the technical one, you were very active in the buybacks in the quarter.

What should we think of in terms of ongoing buybacks?

Is there any update on what you did so far?

But my broader question is, with consolidation for the managed care guys pending and with a lot of discussion about various incentive payments for part of the managed care guys with providers, either positive incentives or putting providers at risk, are you seeing any change in contracting behavior as you look out over the next year or two and what percentage of your contracts are locked up?

Any color on what you're seeing there?

Milton, do you want to take number one and then Sam, two?

Sure.

As I mentioned in my comments, at the end of the quarter we had just under $2 billion remaining on our share repurchase, $1.983 billion.

But, I'll go ahead and give you an update.

Through yesterday, the close of market activity, our remaining authorization is $1.708 billion.

So just over $1.7 billion remaining so we have been active since the end of the quarter.

Obviously we'll go into an open period here shortly by tomorrow and so we'll evaluate our purchasing patterns as we go through the next several weeks.

But we have remained active in the market since the end of the first quarter, A.J.

Great, Sam?

On the managed-care front, I think the general comment is this.

The pricing environment is generally consistent across most of our markets with what we've seen over the past 24 to 36 months.

There are some nuances from one market to the other, with one contract or the other, where we have to adjust the structural pieces of the contract; but again, those are more on the fringe than in the core aspects of the contract.

For the Company, we're largely contracted for all of 2016 as we indicated in our guidance.

We're about 70% contracted in 2017 and about 45% contracted for 2018.

And in general, the pricing escalation and the structural aspects of those contracts are pretty much consistent with what we've seen in the past 24 to 36 months.

We don't believe that the consolidation across our 42 markets of the payors is going to have a global impact on HCA.

We think if those particular mergers are consummated, that in some markets it could have some nuanced impact; but again, we don't see that as a material change in what's going on in the marketplace.

All right, thanks.

Josh Raskin, Barclays.

Hi, thanks.

I wanted to concentrate on the divergence in growth rates on your surgeries, inpatient versus outpatient.

And trying to figure out how much of that is patient preference or physician movement relative to how much of that is HCA initiatives around growth in your surgery centers and your specific initiatives to do that.

I guess trying to figure out how much of that is intentional versus how much of that is just market-driven?

Sam?

Will, we have a very robust surgical-growth initiative, in general, across the Company.

And we call it our OR of choice initiative where we are very sensitive to physician issues, patient issues, scheduling issues and so forth.

We've been very aggressive with our equipment investment and that has application across both the inpatient and outpatient.

On the inpatient side, the inpatient surgeries tend to be more connected to our approach in driving more complex care.

Trauma care, burn care, deeper capabilities in orthopedics and neuro sciences.

So, those are a little slower moving, I would say, in general.

Although, our inpatient surgery growth has been very steady over the last three and a half years, where we've seen pretty consistent growth.

I'm counting up the quarters as I look here.

Almost 11 straight quarters of inpatient surgical growth across HCA.

On the outpatient side we, again, are seeing demand growth in outpatient surgery and we've tried to create two venues for patients and physicians to operate.

One being freestanding ambulatory surgery centers where, again, we've added to our portfolio over the past few years and we have efforts to grow those particular centers.

And then within our hospitals, when we have physicians who like to do inpatient cases, they also tend to want to do their outpatient cases on the same days; and so we're trying to accommodate them as well.

But, in total, our outpatient surgeries have grown very consistently over the same 12, 13 quarters with a little bit of acceleration in this first quarter.

And I can't really point to why it accelerated in the first quarter as compared to the trend, but our efforts are broad-based.

We have a number of initiatives, including capital investments, that are intended to drive surgical activity across the three areas of our business, Inpatient; ambulatory surgery; and then hospital-based outpatient.

Josh, thank you.

Frank Morgan, RBC Capital Markets.

Good morning.

You talked about labor productivity, but I didn't hear any mention of contract labor.

Can you tell us kind of how contract-labor trends ran relative to a year ago and recent quarters?

And then, also, could you provide a comment on the recent Florida legislation on balanced billing and out-of-network?

Sam, you're up again.

So for labor, we were pleased with the results for labor in the first quarter and we were pleased, in particular, when you look at it sequentially against the fourth quarter of 2015 where we had 3.5% productivity improvement from the fourth quarter to the first quarter, which represents about a 75% flex rate, if you want to call it that, on the incremental volume that we saw from the fourth quarter to the first quarter.

Now in the first quarter, we have to pay more payroll taxes, more unemployment insurance and so forth so our total spend was up about $122 million, because of benefit costs, natural growth that occurs first quarter compared to the fourth quarter.

Compared to last year, we did have a slight margin erosion; two factors drove that.

Share-based comp, you had a piece of that; and then a moderated growth in contract labor being the other piece.

Contract labor for the Company has run the same amount of dollars over the last three quarters now.

So the first quarter did not see any growth in total spend compared to the fourth quarter, which was consistent with the third quarter.

So we've seen some stabilization.

We believe that our efforts around this particular area presents an opportunity for HCA in the future if we can stem some of the nursing turnover that we have experienced and improve our retention efforts -- and we have a number of initiatives to deal with that -- we think we can drive some incremental improvements over time in this particular area.

So all in all, the productivity and the results from a labor standpoint for HCA in the quarter were well-managed, we believe, when you look at it compared to where we were in the fourth quarter.

With respect to the balanced billing issue in Florida, we're not thinking that's going to create a lot of issues for us one way or the other.

We believe for our patients it is going to be beneficial in that it will eliminate, in many instances, potential surprise billings around certain hospital-based physician providers.

But for us, and our approach to the market, and our relationships with our physician-contract companies, we're not anticipating any kind of impact from the balanced billing legislation in Florida.

Frank, thank you.

Whit Mayo with Robert W. Baird.

Thanks, good morning.

I feel like you guys have a lot underway behind the scenes with HPG and I sense that there's some momentum in some areas like pharmacy and distribution centers and how you're aligning pharmacists with the supply-chain decisions.

Just any comments around these initiatives would be helpful.

I'll take that one.

And you're right; we have a lot of momentum inside the health trust purchasing group, not only with activities with our members, as Milton said, with the [tenet] integration and some others that they are very integrated with us, from an operational standpoint, and have been over ten years from managing our distribution centers, accounts payable.

And we have some recent initiatives there that we've still become very encouraged with.

One of them is what we refer to as a pharmacy consolidation initiative that we have going on throughout the markets in HCA where we consolidate the pharmacy supply chain as well as the pharmacy-distribution chain and embed pharmacists in there to work with our clinicians on the floor to ensure that the prescriptions and the pharmacy utilization is optimized on there.

In addition, it helps us with the procurement of pharmacy in looking at the storage and inventory on there; so it's just one more initiative that we have going on.

They're embedded in our operating rooms to help us manage our inventory-supply chain within the operating rooms as well as many other distribution efforts.

So the overall HPG from one aggregated spend on the GPO, as well as operational initiatives, I think, continue to deliver a lot of value to HCA and its members.

I'll just add with respect to HPG, it continues to grow.

We're very pleased with the growth in terms of purchasing power.

Being a GPO that's a major piece of the leverage is purchasing power.

I think for 2016, HPG will probably hit somewhere in the $27 billion to $28 billion range in terms of purchasing power across all the membership; and that's again, that is a committed-compliance model.

And I think that will allow us to continue to not only focus on improving operational results with better supply-chain management, but also continue to achieve better pricing from vendors as a result of being able to do market share to them.

Thank you, Chris.

Kevin Fischbeck, Bank of America Merrill Lynch.

Great, thanks.

A question on the psych and the rehab volumes; the numbers were pretty solid numbers, but, really sharply down over where they've been the last few years.

I just want to see if there was anything going on there as far as how you were spending your capital?

And thoughts about the IMB exclusion, whether that makes you think differently about how you pursue psych volumes, whether you want to outsource that or actually build freestanding psychs to take advantage of that?

In total, behavioral health admissions were off the trend at 2.7%.

They have been trending in the upper single digits.

I think, for the most part, we had 3 facilities out of our 58 that were down significantly.

And when you look at the other 55, they were actually on trend; so we had a challenge or two at 2 facilities, 3 facilities rather, that created the composite problem for the Company.

There is no change in our strategy.

We continue to invest in behavioral-health capacity and we have a lot of demand for that; we recently approved some expansion of behavioral health capabilities in a number of markets to deal with that.

In some instances, we have struggled with psychiatrists in the supplied physician coverage, and that's been more the barrier to growth than actual capacity.

But behavioral health continues to be a very important component and service line for our market strategy as well as a complement to our emergency-room [certifying] strategy.

On the rehab side, again, we did see a little bit of volume growth that was off trend.

Rehab was more in the upper single digits as well.

Again no significant change across the Company with respect to capital investment or focus on that particular service line.

It was unusually soft in the first quarter; again a couple of hospitals explained some of that.

We have seen in a few markets where we've had some bundled pilots that has had a marginal impact; but, all in all, that continues to be a very strong service line.

We have investments going forward into that particular service line; we're adding capacity.

And, again, it complements very important service lines for HCA, like neuro sciences, trauma, in burn, in service lines like that.

So we see opportunities for growth in that one as well.

Do you want to address the IMB exclusion, Bill?

We don't think it's going to have any material impact on HCA.

The majority of our behavioral health is still sourced from our emergency room.

So again, I think, as Sam said it, I don't think that changes our strategy at all going forward.

Thanks, Kevin.

Andrew Schenker, Morgan Stanley.

Thanks.

I just wanted to talk a little bit more about the other operating expense line.

It was certainly higher than we expected.

I appreciate that it's roughly consistent with second-half 2015 numbers, but it certainly was up 40 basis points year over year.

Historically it's usually stepped down or been flat year over year.

It actually stepped up sequentially, rather.

What was behind that increase?

And, based on your comments around 2H, should we be thinking of 18.1% as the new run rate or was there something particularly high in the quarter?

Thank you.

Let me say that other operating expenses generally stay about the same from the fourth quarter to the first quarter.

We did see a little bit of a trend change last year where it actually trended down a bit in the first quarter.

But, in general, when I look back over 3 to 4 years, it stays about the same and that is what we saw this year; the fourth quarter and the first quarter were almost identical.

So when you look at it compared to the first quarter of last year, the execution of our service-line initiatives, primarily trauma and then, secondarily, graduate medical education, is driving professional-fee expense growth for the Company.

We saw some deterioration in margin primarily because of professional-fee expense and there were three things that drove that.

First, we did an acquisition of a physician network in northern California last year, where most of the cost of that particular acquisition are in other expenses; and that drove a piece of the margin erosion.

The second piece, and probably the more important piece, and more connected to the Company's strategy, is around trauma-program development where we'd have to invest in professional fees to support our trauma programs; and again, we have added significant amount of trauma programs.

Some are in their early stage startup modes, so you see a little bit of a disproportionate load of other operating expenses as a result.

And then the third piece was in our graduate medical education programs where we have added graduate medical education programs for residents and so forth at a number of our facilities which require some level of professional fees for faculty and such, so that we can support those programs.

All in all, we think there will be some growth in these numbers over the remaining portion of the year, but not in any way where it changes our trend and our expectation on the margin level that Bill laid out.

If you look at some of our components, like our ER physician call per ER visit or ER call pay per ER visit, those are generally in line with what we expected, slightly up again because of these program changes.

So that's the biggest driver of our other expenses on a year over year.

But it's very consistent, like Bill said, with the fourth quarter and even the third quarter, so the run rate is really not that materially changed.

Andy, thanks.

Scott Fidel with Credit Suisse.

Thanks.

I had a question just on the exchange volumes and recognizing that it's still a small piece of the overall business.

Just interested in terms of the year over year and even in terms of some of the sequential volume increases, whether you've observed any type of rising case mix or acuity on those types of admissions from the exchange patients?

Bill?

Scott, thanks.

Actually, on our exchange business, it's staying really consistent if you look at the mix, the case-mix index or the acuity of what we were running in 2015 and, for that matter, even in 2014.

So, as you know, we look at a variety of characteristics of the exchange volume, source of admission, surgical-medical mix.

And it is staying relatively consistent in 2016 is the best way to describe that.

So, as I said in my comments, we are seeing growth, continued growth in reform and I think that's largely attributable to the new enrollment that we saw this year starting in January.

And so, with any hope, we'll continue to see that growing going forward.

But in terms of the mix in the exchange mix volume and the characteristics, very comparable in 2016 compared to what it was in 2015.

All right, thanks, Scott.

Brian Tanquilut with Jefferies.

Sam, you talked about a freestanding ED as driving 30% plus of the growth in the ER space.

So do you mind sharing with us what your growth plans are for that side of your Business?

What do you see in terms of acuity levels in freestanding EDs and are we seeing a change in how people use ERs in the markets where you are opening these facilities?

Sam?

Like we said, we have 56 freestanding emergency rooms today.

That's up from 44 last year at this time.

I think next year at this time, we will probably be somewhere between, depending on how quickly we get these up, 10 to 12 more as well.

So our pipeline on development of these freestanding emergency rooms is still fairly strong.

We should be somewhere around 70, I think, in the next 12 to 18 months.

The acuity level tends to be a bit lower than what you'd see in a hospital-based emergency room for a couple of reasons.

One, obviously trauma cases aren't going to a freestanding emergency room, certain chest-pain events are not going to a freestanding emergency room, nor are stroke events.

So you have a natural tendency towards the more acute patients which are delivered by ambulance to go to a hospital-based, because it's highly likely that they will be admitted.

I think the freestanding emergency room plays a very important part in our network development.

It plays a very important part in our outreach to consumers to make it easy for them to access the system.

I don't know that the ER, as a venue if you will, is changing in any significant way.

I do believe, though, that urgent care and emergency rooms over the past 3 to 5 years, and I think this will be the case going forward, is still a substitute for the shortages of primary-care physicians that exist in a lot of markets.

And so you see, urgent care, free-standing emergency rooms and even hospital-based emergency rooms providing the solution that patients are looking for when they can't get in to a physician clinic because of physician shortages or because of payor dynamics.

So from that standpoint, that probably structurally stays in place; and we think it's part of the reason for the overall demand growth that we've seen over the past few years in emergency-room visit volume.

And we think that will continue in the near-term.

Thanks.

Stephanie we have time for probably two more questions.

Matthew Borsch, Goldman Sachs.

Yes, thank you.

I'm sorry if this is already something you can calculate from the numbers you provided, but can you back out, give us the managed-care admissions and adjusted admissions excluding the exchange lives?

And I'm not saying that's the right way to look at it; I'm just wondering if you have that, that you can share with us?

Bill?

I don't know whether you have that or not?

We can get that; I'll qualify that a large portion of our exchange business is coming from previously insured, so it's skewed and that's why we included the exchanges in that number.

It looks like on our managed and other, if you exclude exchanges, is up about 1% on adjusted admissions.

Okay, instead of 2.7%, okay.

So let me ask you, based on what you've seen, is it your conjecture that there has been substantial growth in the exchange enrollment from the previously uninsured?

Or does it look more like mix shift?

I know you can't give an exact answer; I'm just curious if you have an off-the-cuff.

I think it's probably more mixed.

I would not say that we're seeing substantial changes in the exchanges coming from previously insured.

As we reported last year, historically in the exchanges in the first couple years, about 40% of that exchange volume is newly insured and 60% was coming from previously insured.

My sense is those trends are staying relatively the same.

So I don't really see there's dramatic shifts in that aspect of that; that'd obviously be in year three.

The current-year exchange volume was also probably in exchange patient last year too.

So that's changing a little bit, but I would say that growth is more continued market share and mix-shift changes that we're seeing.

Got it.

Thank you.

One more question, Stephanie.

Chris Rigg with Susquehanna Financial Group.

Good morning.

Just on the operating cash flow, I think you previously said you expected around $5 billion.

Given the Quarterly Results, do you see that going higher?

And then on the CapEx, when we look at $2.7 billion, can you give us a sense for how much of that is going towards just real, basic maintenance CapEx versus growth things like the freestanding ERs?

Thanks a lot.

Guys?

I will start.

Right now I think about $5 billion cash flow from operations; that's what we're projecting right now.

There are some quarter-by-quarter fluctuations that may occur, but, for right now, we still think that's a good planning number.

On our capital deployment of $2.7 billion, Milton said there's about $250 million of that of IT.

Roughly 40% or so are routine.

And then 50% to 60% in terms of growth capital deployment.

As Milton said in our comments, that is spread among program development, access points and building new capacity.

So when you take IT routine, it is roughly 45% or so of our total capital and the balance being growth-capital deployment.

This is Sam.

Let me add one thing to what Bill just said.

I think HCA has a very diversified capital allocation strategy in general; but, specifically to our capital expenditure allocation strategy, it too is diversified across markets, across service lines and across the different kinds of facility base and that creates a very conservative, confident level of allocation for the Company, in my opinion.

All right, Chris, thank you very much.

And I think with that, we'll call it a day.

Mark is here.

We look forward to seeing some of you at the conferences that are coming up.

And you all have a good day.

This concludes our conference.

Thank you for your participation.