美國醫院公司 (HCA) 2016 Q2 法說會逐字稿

Good day, everyone. Welcome to the HCA second quarter 2016 earnings conference call. Today's conference call is being recorded. I'd like to turn the call over to Senior Vice President Mr. Vic Campbell. Please go ahead, sir.

All right, Alan, thank you very much and good morning, everyone. Mark Kimbrough, our Chief Investment 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, 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 our press release that we issued today 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 addict. 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 claims 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 second quarter earnings release. As you heard, the call is being recorded and replay will be available later today. With that, I'm going to turn the call over to Milton Johnson.

Thank you, Vic, and good morning to everyone joining us on the call and the webcast. I hope each of you have had the opportunity to review HCA's second quarter results released this morning. I'll make a few comments on the quarter and our thoughts on 2016 guidance, and then turn the call over to Bill and Sam to provide more detail on the quarter's results.

Net income attributable to HCA Holdings increased 29.8% to $658 million, or $1.65 per diluted share; a 39.8% increase compared to $507 million, or $1.18 in the prior year second quarter. As noted in our second quarter release, we recognized a $44 million tax benefit, or $0.11 per diluted share, related to the early adoption of the new accounting standard which reduced our provision for income taxes.

Adjusted EBITDA totaled $2.052 billion, an increase of 2.2% over the prior year. We experienced volume growth in both our admissions and emergency room visits, although at a more modest growth rate as compared to recent quarters.

Same facility admissions increased 0.6%, while same facility equipment admissions increased 1.6%. Same facility emergency room visits increased 4.1% over last year, second quarter. Inpatient and outpatient surgery volumes reflect solid growth over the second quarter of last year. Total surgery cases grew 1.6% on a same facility basis.

Sam will provide additional comments on our volume trends in just a moment. Once again, we experienced strong growth in cash flows from operations, totaling $1.349 billion, compared to $1.057 billion in the prior year, second quarter, an increase of 28%.

We deployed $663 million from capital expenditures and $1.237 billion to repurchase 15.506 million shares which included $750 million to repurchase 9.361 million shares from KKR during the quarter. We have repurchased a total of 24.427 million shares in 2016, at an average price of $76.04.

We had approximately $750 million remaining on our $3 billion authorization at June 30, 2016, and also during the quarter, we purchased three hospitals in the Dallas-Fort Worth and Austin, Texas, markets, which we believe will broaden and strengthen our market presence in the future.

We expect to see inpatient and outpatient services growth in our markets in the years ahead. We are committing capital to meet this increase in demand. For example, recently when announced a $650 million capital commitment on our Miami-Dade, Palm Beach, and St. Lucie County facilities to expand and upgrade our patient service offerings.

This includes the construction of a new facility on the campus of Nova Southeastern University in Davie, Florida, along with several other expansion facility upgrades within the market. These investments will allow us to better serve communities, respond to the growing demand for health care services, and provide the highest level of patient care experience.

I want to take a minute to recognize a number of senior appointments we've announced over the past quarter, all of whom have been promoted from within HCA. Due to retirements, we have made three new division presidents. In addition, we announced a new Senior Vice President of Employer and Payer in Dayton. These are all seasoned professionals with many years of experience in their discipline and in HCA. They know our culture, they understand our business strategies, and I am extremely pleased that we have a deep bench to ensure strong continuity. So congratulations to all of them.

Now moving to 2016 guidance. Primarily due to volume growth at the low end of our expectations during the first six months of 2016, we are revising our full-year 26 team guidance expectations. As noted in this morning's earnings release, our revenue range is now estimated to be between $41 billion and $42 billion. Adjusted EBITDA is now expected to range between $8.1 billion and $8.3 billion. And our adjusted EPS range is now estimated between $6.40 to $6.70 per diluted share.

We thought an increased net income share repurchase, and the favorable impact of change in accounting standards could lower our tax rate for the first six months of 2016. Our guidance for capital expenditures for 2016 remains around $2.7 billion. So with that, I will turn the call over to Bill.

Great. Good morning, everyone. And I will add to Milton's comments and provide more detail on performance and our health reform trends in the quarter. As we reported in the second quarter, our same facility admissions increased 0.6% over prior year and equivalent admissions increased 1.6%. Sam will provide more commentary in a moment, but I'll give you some trends by payer class.

During the second quarter, same facility Medicare admissions and equivalent admissions increased 1.2% and 2.1% respectively. This includes both traditional and managed Medicare. Managed Medicare admissions increased 3.9% on a same facility basis and now represent 33.5% of our total Medicare admissions. Same facility Medicaid admissions and equivalent admissions increased 0.5% and 2.1% respectively in the quarter, which is fairly consistent with our recent trends.

Same facility self-pay and charity admissions increased 5.7% in the quarter. And may represent 7.5% of total admissions compared to 7.1% in the second quarter of last year. Year-to-date, our same facility uninsured admissions are up 7.8% in the same period last year. Managed care and other, which include exchange admissions, declined 1.6% and equivalent admissions declined 0.8% on a same facility basis in the second quarter compared to the prior year.

On a year-to-date basis, same facility managed other an exchange admissions are flat with prior year and equivalent admissions are up 0.9%. Same facility emergency room visits increased 4.1% in the quarter, compared to the prior year. And our same facility self-pay and charity ER visits represent 19.4% of our total ER visits in the quarter, compared to 19.3% last year.

Intensity of service or acuity increased in the quarter with our same facility case mix increasing 3.9%, compared to the prior-year period. Same facility surgeries increased 1.6% in the quarter. The same facility inpatient surgeries increasing 1.8%, and outpatient surgeries increasing 1.5% from the prior year. Same facility revenue per equivalent admission increased 2.1%. Same facility managed care and other, including exchange revenue per equivalent admission, increased 5.8% in the quarter.

Same facility charity care and uninsured discounts increased $863 million in the quarter compared to the prior year. Same facility charity care discounts totaled $1.097 billion in the quarter, an increase of $207 million from the prior-year period. While same facility uninsured discounts totaled $3.085 billion, an increase of $656 million over the prior-year period. Our total uncompensated care trends, which include bad debts, charity, and uninsured discounts combined, have been consistent over the past four quarters.

Now turning to expenses. Expense Management the quarter was good. Same facility operating expense per equivalent admission increased 2.4% compared to last year's second quarter. Our consolidated adjusted EBITDA margin adjusted for share-based comp and HER incentive income, was 20.5% for the quarter as compared to 20.7% in the second quarter of last year.

Sequentially, it has increased 40 basis points from the first quarter of this year. Same facility salaries per equivalent admission increased 2.4%, compared to last year's second quarter. Salaries and benefits as a percentage of revenue increased 10 basis points compared to the second quarter of 2015. Same facility supply expense per equivalent admission increased 0.9% for the second quarter, compared to the prior-year period, reflecting growth in surgical volumes and an impact of this volume growth did offset by several supply chain initiatives that we have implemented. And this helped lead to supply cost revenue to increase 20 basis points versus the prior year period.

Other operating expenses as a percentage of revenue increased 30 basis points from last year's second quarter to 18.0% of revenues, primarily reflecting an increase in our year-over-year professional fees that we discussed on our first-quarter call. However, other operating expenses as a percentage of revenue have remained level for the past four quarters.

We recognize $5 million electronic health record income in the quarter, compared to $18 million in last year's second quarter, consistent with our expectations. Let me touch briefly on cash flow. We had another strong quarter with cash flows from operations totaling $1.349 billion. Year-to-date cash flows from operations, $2.748 billion for a 32.4% increase from prior year.

Cash flow from operations is benefited by $118 million on a year-to-date basis due to the adoption of the accounting policy around excess tax benefits related to the settlement of equity awards. At the end of the quarter, we had approximately $1.98 billion available under our revolving credit facilities. Debt to adjusted EBITDA was 3.93 times of June 30 of 2016, compared to 3.85 times at December 31 of 2015.

I also want to highlight our earnings per share results. For the quarter, our diluted earnings per share before considering losses on retirement of debt, legal costs, and gain or losses of sales of facilities increased to $1.66 per diluted share and $1.37 in the prior year period. When adjusted for the $0.11 benefit to the adopting of the new accounting policy represents a 13% growth of the prior year in the quarter.

These strong cash flow trends, balance sheet position, and EPS growth results highlight an important strength of the Company. Let me touch briefly on health care reform. Health reform activity continued to grow in the quarter. In the second quarter, we saw approximately 13,300 same facility exchange admissions as compared to the 11,600 we saw in the second quarter of last year, for a 15% year-over-year growth.

You may recall we saw about 12,500 exchange admissions in the first quarter. We saw approximately 54,000 same facility exchange ER visits in the second quarter, compared to just under 45,000 in the second quarter of 2015, and just under 50,000 in the first quarter of 2016.

So overall, these reform trends are tracking in line with our expectations. So that concludes my remarks and I'll turn the call over to Sam for some additional comments.

Good morning. Let me begin by giving you some of the quarterly volume stats that I normally provide on these calls. Once again, the Company continued to have broad-based growth across our market and broad-based growth across the various service lines that make up our business.

For our domestic operations, on a same facility basis, 10 of 14 divisions had growth in admission. 11 of 14 divisions had growth in adjusted admission. And 12 of 14 divisions had growth in emergency-room visits. Freestanding emergency room visits grew 27% and accounted for approximately 50% of our overall ER growth. Hospital-based emergency room visits grew 2.2%.

In addition to the strong portfolio performance, the company's growth across its diversified service lines was also strong. For domestic operations, on a same facility basis, inpatient surgeries grew 1.7%, which increased surgical admissions to 28.6% of total in the quarter, an increase of 130 basis points. Surgical volumes were particularly strong in cardiovascular, orthopedic, and general surgery categories.

Outpatient surgeries grew by 1.4%. Both components of this service line, hospital-based and our freestanding ambulatory division, had solid growth. Also, same facility outpatient endoscopic procedures grew 1.6%. Behavioral health admissions grew 3.7%. Rehab admissions grew 1.2%. Cardiology procedure volumes grew approximately 2%. Trauma volumes grew 14%. Observation visits were up 7.5%. Ad finally, the company's urgent care business on a non-same facility basis grew 11%.

Two related service lines experienced declines in the quarter. Deliveries were down 1.5% in the quarter, and neonatal admissions declined 2.6%. Overall, average length of stay increased 0.6%, 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. I would also note that our inpatient marketshare for the year ended 2015 shows that HCA continues to gain share in total and across most of its markets.

As stated earlier, our volume growth, in particular inpatient admission, was at the lower end of our expectations. Most of this can be attributed to three areas, but before I explain them, it is important to note that the second quarter of last year was very strong and presented a difficult comparison, with inpatient admissions up 4.1% and adjusted admissions up 4.9%.

First, growth in emergency-room visits in our hospital-based units slowed, as compared to the past few years. As a result, downstream growth in inpatient admission through the ER was not as strong as compared to recent quarters. We believe most of the softness can be explained by three factors. First, a slowing in demand growth to more normal rate. Second, new competition in several markets. And third, in a couple of our Florida markets, we experienced a change in how certain Medicare Advantage payers classify their patients between inpatient admission and observation status.

The Company continues to execute the comprehensive agenda to grow our emergency room visits, which we believe is a service line with strong overall demand growth. Second, growth in our behavioral and rehab service lines was off the recent trends. We believe that this is mostly a result of capacity constraints caused by clinical staffing and a lack of beds at a few of our behavioral units. On the rehab side of our business, the issues are not as easily categorized. We have not opened as many units this year as compared to past years, and we have seen some modest impact in a few markets from the CMS Bundled Payment Initiative.

We continue to invest in and recruit talent for these service lines and we believe they have a solid growth prospect in many of our markets. And finally, women's and children's admissions were down as I indicated previously. The primary reasons are, one, broad-based softness in deliveries drove a downstream decline in neonatal admissions. Some competitive issues in a few markets, and general declines in pediatric volumes due to a milder respiratory season as compared to last year.

The services continue to be an important part of our overall network strategy and we believe the Company is well-positioned to compete effectively in these areas. All in all, the Company continues to have solid top-line growth and sustained market share gains. Our growth agenda is comprehensive. It is well resourced for capital spending and marketing, and we continue to execute at a high level. We believe the Company has solid growth prospects across a uniquely diversified portfolio of markets and service lines, and we believe our local provider systems are well-positioned to capitalize on them. With that, let me turn the call back to Vic.

Alright, thank you, Sam. Alan, if you'll come back on and we will start taking questions. And as Alan will ask you as well, we would like to keep questions to one at a time so everyone gets an opportunity. Thanks.

(Operator Instructions)

We'll first go to Whit Mayo with Robert Baird.

Thanks, good morning. Might just blow my question on cash flow. Just really curious how you expect cash flow from ops to trend this year, Bill? And really, the corollary to this question is maybe just a range of free cash flow after non-controlling interest and did that really change after the second quarter versus your previous expectations?

Yes, hey, good morning, Whit. As we look at cash flow from operations, obviously it's been very strong year-to-date. We are encouraged, we anticipate that strength to continue. We have previously said our cash flow from operations would be about (5.5) to $5.5 billion. I think we're still within that range, and free cash flow being around that $2 billion to $2.2 billion is still what we anticipate at this stage of the year.

Great, so no change to that.

No.

Okay, thank you.

Thanks, Whit. Hey, Whit, let me just add one more thing. Other than the impact of the accounting change that we talked about, we haven't projected for that for the balance of the year.

Okay thanks.

Sheryl Skolnick with Mizuho.

Good, great, thank you. So, we all knew it was going to be tough to go against the great job you did last year on volume, but I'd like to delve into that because as volumes goes, so goes everything else.

If I could just recap, and then ask the question first, I think what we're seeing here is growth across a broad range of types of admissions and payer types, but softer than you had expected. I think I heard you say managed-care admissions were down, so I'd like some explanation of that, where it happened and whether or not it's likely to be sustained.

Third, we heard you on the other side of this, talk about capacity constraints and I'm wondering to what extent your capacity constraints is limiting your near-term growth, and what your plans are for investing beyond Florida, what you've announced to offset that.

And then, fourth, you have the fact that you are investing in capacity, so there's a bit of a mixed message here, is the way I'm seeing it, that, yes, on the one hand, you are pulling in guidance prudently to reflect a little bit less strength, but still growth. On the other hand, I hear what you're saying about investing in capacity so it sounds as if there might be a demand story here and a continued execution story.

So can you tell us what we should think about the near-term pushes and pulls, versus the long-term growth and expectations you have for volumes, and how we should think about the Company in that context?

Sheryl, thank you that's a great question. Bill, do you want to lead?

Yes, let me just -- I know Sam can give additional color and details on this, but first of all, Sheryl, I think you are right. What we're seeing is we're still seeing growth and by longer-term historical standards, I think very solid growth, and that's, hopefully we are expressing that this morning. But by recent growth standards, we're seeing a slowing.

We went through, over the past five or six quarters, growth that was exceptional. And we saw demand in our markets growing. And we suspect, although as you know, our market share data lags about six months, but we suspect we're going to see some slowing demand in many of our markets and that's why we are seeing it show up in our numbers.

That being said, we still have a great outlook and a very optimistic outlook for the long-term in our markets. Our markets are growing in terms of population. And I think we'll continue to see demand in our markets and so we are going to invest to meet that expected demand. And we have certain markets -- I know Sam can give color on the South Florida markets, where we announced the $650 million investment while we're doing that. And Sam can describe that to you in just a minute, but we still think our markets were well-positioned in our markets and we're going to invest to make sure we stay well-positioned in these excellent markets in which we operate. So Sam, do want to add a little more color to that?

I don't think, though, in the second quarter, capacity constraint played a broad-based role in the softening. There are pockets where we clearly know it's difficult day in and day out to manage the capacity challenges and that could, in fact, squeeze out a few patients here or there but in total I don't think that was a material impact in the quarter.

We have a very sophisticated approach to capital expenditures. We have capacity triggers, we have production triggers that we use in determining whether or not we should consider capital for a particular situation, and so that process continues, nothing's changed, and we've monitored that in the context of macros within the market, our strategic approach within the facility at a micro level, and all that weaves into a capital decision.

Capital takes a while to get into the marketplace on average, you know, it's 18 to 30 months, depending on a project because we are usually doing it to existing assets, so that timing gives us a bit of a hedge also, I think, by deploying capital across the Company.

Specifically, you can give an example of east Florida and what we've done there, and a number of these projects have been approved. We packaged them up because we thought it was a very sizable commitment and a very effective message for our constituents in that market.

The South Florida market is the largest healthcare demand market in HCA. Dallas is second, Houston is third. So Miami is a big market, we have the largest position in Miami with our market share globally. Our volumes over the past five years have grown significantly. Our average daily census is up 25%. We have a number of our key institutions that are running 85% and 90% inpatient occupancy. Our emergency room visits over that time period have grown almost 250,000 visits, or almost 50%.

It's a large commercial market, so for us, and when you look at the macros in South Florida, we believe we have to get the capacity in play in order to sustain growth over time. And that's how we think about these investments and this is just a very solid sort of microcosm, if you will, of a number of markets and number of situations inside of HCA and how we approach it.

But capital is a very important part of market share gains, it's a very important part of constituency satisfaction, especially our physicians, and then obviously our patients and that they have the kind of facility presentation and technology needed. And it continues to play a big part in our overall efforts to grow market share and position our company to be effective in delivering care and competitive in the marketplace.

If I could just refine this, please, to answer the other part of the question. How should we think about the near-term volume outlook for the company, versus the longer-term volume outlook? And can you just go through the managed-care and what happened there?

Well I think on managed-care we were flattish, let's just say, modestly down. That's a little bit below where we expected this year. I mean, the last six quarters have been incredibly strong from a commercial demand standpoint across all of our markets, and in commercial volume inside of HCA. We knew that was going to taper, we just didn't know when exactly and how much, and I don't know that the second quarter is necessarily reflective of any near-term volume trend with respect to that.

The second quarter last year was a very strong commercial volume growth, if I remember correctly, Bill, and so that was part of the challenge here. We have a couple of markets where there's been some trend changes. The observation issue in the Florida markets impacted our admission statistic a bit and that's part of it. A couple of Texas markets have softened some but not materially different than the Company as a whole.

In Las Vegas, two of our hospitals, I mean, two of our competitors have now reentered a payer contract that previously they weren't in, so we lost a little commercial business there. So there's all these little components that play into our number, but I think the demand will normalize and that trend, we think, in the short run to intermediate run on commercial, ought to be somewhere between 1% and 2 %. We think overall demand is 2% to 2.5% potentially, but again, we are going to have to see some data in the first part of this year to fully validate those assumptions, but that's where we believe the trends are for the HCA markets.

Sheryl, one thing I might just add and that is, as we all know, the health exchange admissions really grew last year. Again, they are a small piece of the company, but if you look at what they added to admission growth last year in the second quarter, versus this year, while we're still -- it's about a 100 basis points swing. So that's also one factor to keep in mind when you start comping the last year

I just wanted to point out, you know, I think Bill, 2.4% up year-to-date on our just admission growth. You recall we gave guidance of 2.5% to 4%, so we're at the low end of that range. And so, you think about the short-term the next six months, we think we can finish within the range, but it will probably be in the lower end of our range when we finish up the year.

Sheryl, thanks.

Thank you so much.

Next, we'll go to A.J. Rice with UBS.

Hi, thanks. I might switch gears and ask you about some update on the payer side. I wonder, you mentioned about some pressure from managed-care in Florida on a push in observation stage, which we've heard from some of the others.

Can you broadly comment on where you're at in contracting future business with managed care guys? Is that the change in terms of the contracts you're seeing or does that relate more to just being aggressive on utilization review? And you mentioned Sam I think in your comments about bundled payments and what you're seeing there, can you comment on the government's initiatives around CJR and what you've learned and a little more on the impact that's having?

Okay. We are about 75% contracted for 2017, again, as consistent lease in past year terms. We are about 50% contracted on 18 similarly. As far as the components of that, we are not seeing any substantial changes in structure or provisions inside of those agreements.

On the observations status issue, it was more a Medicare Advantage issue than it was a non-Medicare issue. A little bit on the commercial. But not as much, and more Medicare Advantage, but a little bit on the commercial because of that.

We are not convinced yet that we are being equitably dealt with on some of those status things and working with the payers to get a more clinically driven protocol around those. An that, we believe, will normalize at some point, but nonetheless, that's out there as an issue and it has been an issue but it was a little bit more advanced I think in the second quarter. So that's the payer side.

On the bundled payment issue, again, it's hard to have current data. This is a very sort of slow-moving data-driven process with the government. What I was speaking to was in particular on our rehab business and only in a couple of markets have we seen the BPCI program, the bundled payment initiative pilot program, have a modest impact on referrals under our rehab centers.

There have been some components of our participation in those pilots where we've seen some modest adjustments in post-acute care referral patterns. Again, it's sort of spotty across the different components of post-acute. On the CJR side, it's way too early to be able to understand what the implications are there. We are just starting to get in the game, and again, we've seen some modest changes in referral patterns, but not to the point where for ACA, we believe it compromises the opportunity to develop rehab service lines and fully integrate that into other components of our business

So orthopedics is an example not the only driver of rehab business for HCA. Trauma is the driver, rural clients is our driver, outreach into the rural markets is a driver. So we have multiple drivers that deliver downstream rehab business, and so from that standpoint, we have a little bit of a drag with the bundle program, but we still have a lot of business opportunity on the other side that justifies our investments. Rehab admissions for HCA are 1% of our total, so it doesn't really move the needle at all.

AJ, thank you.

Next, we'll go to Chris Rigg with Susquehanna Financial Group.

Good morning. I just wanted to ask about labor. It doesn't seem like you guys are having issues, but given some of the issues that have been discussed by your peers, I'd love to just get a sense for what you're seeing in the market and just overall labor. Thanks.

All right, Chris, thank you. Sam?

We are very pleased with the last three quarters of performance by our management teams in the field. They have responded in a very effective way. As you've seen on our income statement, we've been able to maintain our productivity levels, we've been able to maintain our margin levels, if you will, with labor over those periods of time, and we are still facing some level of challenges. Obviously, we're using more contract labor than we want, however, contract labor for the company has stabilized over the last four quarters, and actually, on a per unit basis in the second quarter was below the first quarter when you look at contract labor per adjusted patient day.

RN retention is a big focus inside of our company right now. We have opportunities to enhance RN retention and we are seeing early signs of improvement at a number of hospitals that we've focused on. We had a second workshop for another 20 hospitals inside of HCA, and we're optimistic that we will start to see some leveraging of best practices and performance there that will, over time, I think help address some of these challenges.

Our recruitment function inside of 1HR continues to improve and get more agile in responding to dynamics in the market. We do have pockets of challenges with wages that we have to step up and deal with. Some of those are being dealt with as we speak, some of them have been dealt with over the past few quarters, and some of them will be dealt with in the future.

Having said that, I don't think there's going to be a material change in our composite average hourly rate across the company. It could move a little bit from one quarter to the other, but largely, it's in the zone of where we anticipated and we believe it to be manageable.

Chris, thank you.

Next we'll go Frank Morgan with RBC Capital Markets.

Good morning. A lot of good color around the top line issues, and obviously you mentioned labor. I'm just curious on the bad debts, can you talk a little bit about what you're seeing there? I noticed that sequentially your provision was down, but it sounds like the volume of that admits related to uninsured are down, so just any color there. Thanks.

Yes, thank you, Frank. Bill, you want to?

Sure, good morning, Frank. We look at one, our uninsured volumes, you can see was 5.7% for the quarter, and on a year-to-date basis is following right in line with our expectations. When I look at uncompensated care, bad debt, charity, and uninsured combined, as I mentioned in my comments and I look at really the past three, and even into Q3 of last year, it has remained very stable. When I look at our uncompensated care as a percentage of our adjusted revenue, it is relatively flat for the past three quarters.

We anticipate our uninsured volume to track with our emergency-room uninsured volume and indeed that's what exactly is happening, so I wouldn't really characterize the environment as very stable for us at this stage. Our teams are doing a great job as we continue to manage the collectability and the revenue cycle associated with it, but uncomped care for the past three quarters has remained very stable.

Thank you, Frank.

Now we'll go to Gary Lieberman with Wells Fargo.

Good morning, thanks for taking the question. As we head into 2017, maybe discuss your expectations for exchange enrollment and any challenges that you might see from some managed-care providers pulling back on the exchanges.

Gary, thank you.

I'll try and then others can add on. Obviously, I think it's still early to predict what will happen in 2017. We've always said that we think our exchange activity will track with enrollment, and so far we haven't really seen material erosion from payers leaving markets in that.

For next year, there's a handful market by market, but it hadn't really kind of raised up as material issue for us right now, so I really think we have to see what the enrollment trends are going to be and projected for 2017 to kind of estimate weather impact it is for us. I'm not so sure -- Sam, do we have any other planned comments that we've seen in the market on exchanges. There's a handful here and there that are exiting and adding, but nothing material at this stage.

Our early stag is nothing material. I don't know exactly what the impact will be in 2017, however, we have added some payers here and there and we will lose some payers as they exit and I'm hopeful that our network is broad enough in order for us to absorb those and we can maintain our market share and hopefully even reposition our market share in some cases. We just have to wait and see exactly how the exchange logs shake out.

All right, Gary, thank you.

Thank you.

Next question comes from Josh Raskin with Barclays.

Thanks, good morning. Question around the outpatient surgery volumes. You know, actually came in a little bit below inpatient this quarter and I think I heard it was ASC and outpatient department, but just curious, maybe more specifically on the surgery centers, or, you know, what you guys are seeing specific in terms of volume, and any initiatives or anything specific in any of your markets that's causing that change in trend.

It actually is more on our historical trend. The first quarter was uniquely high, we couldn't put our fingers around exactly why it was as high as it was. But the second quarter was more on our historical trend, and it was very balanced between our hospital-based unit and our freestanding ambulatory surgery centers.

Our growth is fairly broad-based across the different service lines in those centers and in our hospitals. We have a number of initiatives. Our OR Choice Initiative continues to yield value for us and is a satisfier for physicians and is helping our patient flow and patient satisfaction.

Secondly we are in an acquisition mode on Ambulatory Surgery Centers and endoscopic centers and have added, over the course of the last 12 to 18 months, quite a few additional units. And when you look at our composite non-same store Ambulatory Surgery Center growth in the second quarter, I want to say it was about 4.5%, which reflects some of the acquisitions that we've done and we believe them to be very strategic to physician alignment, greater outreach into the commercial segment, and just advancing a larger network of offerings across HCA's markets.

So we are very pleased with the result in the second quarter and believe we still have opportunities to grow our outpatient surgery volumes with our different initiatives

Thanks John. I'm sorry -- Josh.

Next question comes from Scott Fidel with Credit Suisse.

Thanks. Just actually had another follow-up question on the exchanges. I know that already you are asked about the volume outlook. Just interested if you can talk about on the reimbursement or the rate outlook with the payers, whether you've seen any sort of change in posture from them, in particular just interested in the Blues, given all the losses that they've had. Have they come back and tried to renegotiate the rates, or you're not really seeing any changes on the exchange side?

All of our contract negotiations are a bit different depending on the market, depending on the circumstance, but in general, there hasn't been any dramatic changes in our contract terms around pricing, and I think our reimbursement per unit is in line with our expectations this year, and we anticipate that being the case for next year as well.

So there are pockets here and there. Anthem, I know, recently made an announcement about some challenges with their exchanges. We have a little bit of business with Anthem in the exchanges. We tend to deal with the local state Blues more than we do Anthem, given Texas, Florida, Tennessee, Kansas City, places like that.

So it's not really an Anthem issue for us as much as it is how does the local Blue sort through their pricing challenges and medical loss ratio issues and so forth. In general, for HCA, there's not a lot of change.

Ralph Jacoby with Citibank.

Thanks. Good morning. Just wanted to go to guidance. If we look at just the midpoint, it would call for around 5% EBITDA growth in the second half of the year, versus the low-2's% you've had in the first half.

So I know comps do get easier given some of the pressures in the third quarter, but can you talk about maybe other areas that give you comfort around that growth, just given the slowdown in the top line and maybe some of the continued cost pressures, anything that's considered seasonally, high-tech dollars, anything like that, that would give us, or you, increased comfort in sort of that 5% growth? Thanks.

All right, Milton, you want to lead that?

Yes, and Bill I'm sure has some comments. But you're absolutely right, it implies a 5% growth to get to the midpoint. I think one of the major factors you touched on, the comps get easier especially in the third quarter.

Last year, we were a little bit soft and so we should have a favorable comp for the third quarter, but you know, when you look at our trends, you know, we have factored all the current trends into our guidance, where we think we can achieve the outcome for the second half of the year.

But I don't -- maybe a little bit of seasonality typically that we see in the latter half of the year, in the fourth quarter especially, that's obviously a trend we see every year, and that's built into our thoughts. But nothing with high tech or anything that would call out, that would be outside normal operations would be contributing to that expectation for growth in the second half of the year.

Yes, I don't really have a whole lot to add. You said, you know, third quarter, I think we have a good comp on there. Fourth quarter of last year was a big number for us. As we revised our guidance, we think the midpoint and range we are in is more reflective of what are current trends and we're comfortable with that.

I will say that, one thing too, that overcomping should help this on some of the contract labor issues that we dealt with in the second half of last year. As Sam described all that, we still have opportunity to contract labor, it is moderating in terms of it's stable, in terms of where it is. So hopefully, we will get a little bit of relief in the second half of the year, relative to the comps on contract labor as well.

Thank you, Ralph.

Thanks.

Next we'll go to Andrew Schenker with Morgan Stanley.

Thanks. I just wanted to talk a little bit more about the supply margins, and you guys called out, you saw, you talked about -- I'm getting some weird feedback there. You've talked about continued supply chain initiatives, but as supplies as a percentage of revenues is pretty much declined almost every year for almost a decade now, I mean, how much more options are there? Is this really just continuing to push through better pricing, given the GPO, or are there other more strategic moves that can continue to drive this measure down, or at least continue to slow the growth of supply, versus everything else. Thank you.

Thank you, Andy. Bill, you want to take this?

Yes, let me take the first shot. So as we look at, as you know, supply cost as percent of revenue, year-over-year we had 20 basis point decline. When I look at it here for the past four quarters, we're pretty consistent. 16.7% in Q2, 16.7% in Q1, 16.4% in Q4, 16.7% in Q3.

So it's very stable and we do think that's an accomplishment, given the continued intensity increases in volume growth that we've seen over that time. Our supply chain team as well as our field operators have done an outstanding job from a variety of aspects around supply chain. First, relative to our GPO and contracting, we still have momentum in the marketplace with HealthTrust Purchasing Group, and continue to have a lot of strong performance. And then, our supply chain operations are really a key component of our supply chain story.

We've spoken recently of one of our recent initiatives around pharmacy consolidation, where we can help control the pharmacy spend and utilization of inventory. That is paying great dividends as that initiative is rolling through the marketplace. So we've also got initiatives in the operating suites as well as other initiatives around our performance improvement activities, so when you couple supply chain initiatives operationally with the contracting statuses we have going on, I think that's all leading to us being able to at least maintain our margins on the supply costs line and remain the stability.

You do recall last year we did speak in the third quarter of some pharmacy cost elevation with our pharmacy costs per adjusted admission or adjusted patient day, was elevated in the second and third quarter of last year, mainly due to some high cost drugs that obviously have a lot of press around that. We've seen those supply cost trends moderate -- or the pharmacy cost trends moderate over the past couple quarters in response to some of just the public pressure on those high cost drugs, so that is also benefiting our year-over-year kind of comparison.

And Bill, this is Sam, let me add one comment to that. I think it's another area of opportunity for HCA and our clinical data warehouse and the number of our quality initiatives have, sort of, supply cost utilization, drug utilization, best practice identification, and so forth, attached to it. And as we engage our physicians more than we've done in the past, their understanding of how it helps them, how it helps their facilities, how it helps the patients is another opportunity that I think we are in the early stages of execution on our supply cost.

And so married up with what Bill just talked about on contracting and supply chain operational management, coupled with data and insight connected to our physicians is a very powerful combination that we think still has head room.

All right, thanks Andy.

Next we have Kevin Fischbeck with Bank of America.

Good morning, this is actually Joanna Gajuk filling in for Kevin. Just a quick question, you commented on your volume outlook or rather what you expect to be lower than the previous outlook, but then can you also comment on the pricing outlook because it seems like the first two quarters also are coming in towards the lower end of the guidance that you provided for the full year, but at the same time, seems like at the same-store managed-care rate increases have been pretty solid, so any color on pricing you might give for the year. Thank you.

Joanna, thank you.

I'll start on that end. So when we gave our guidance, we anticipated our revenue per adjusted admission be 2% to 3%. Year-to-date, we're at 2.1%. We reported that number in the second quarter.

When I look at a longer-term view, that's right in range. We've had some quarters a little north of that, some within range. Sam talked about our visibility of our contracting for 2017 and 2018 at pretty consistent terms, so when we look at our pricing measured by our revenue for adjusted admission, it's within our range and I think within our trend that we've seen over the past four to six quarters.

And Bill, I would add that in the second quarter, it probably wasn't as strong because of payer mix with commercial volume being down a bit, obviously that's our best payer, and the delta there can create a little bit of a burden, if you will, in the composite number, but within our commercial book, like Bill said, we are right where we thought we would be and actually a bit better.

Thank you.

Our next question will come from Gary Taylor with JPMorgan.

Good morning. I had a couple clarifications and then my real question. Just the first clarification is, it does look like, Bill, year-to-date, you're favoring bad debt over -- I'm sorry, charity discounts over bad debt, at least versus, kind of a seasonality in the first half. And I know the total write-off looked fine to us, but I just wondered if there was any policy change or anything that was driving the much lower bad debt number that obviously is offset by the higher charity discount.

Yes, I'll take that, Gary. No policy changes relative to our recognition. In any period, you're sometimes subject to news between uninsured discounts, charity, and bad debt. Bad debt in the second quarter is very consistent with our Q1, but really no year-over-year changes.

And that's why think it's best to look at the uncomped care portfolio, including all three of those, and that's why they're consistent, but no changes. And again, in any period, you're subject to maybe some of that in your uninsured discount line versus bad debt, but no policy changes relative to that.

Gary, you're pretty clever. Two clarifications and one question. I think that's three, but that's alright, I'm going to give you points.

The last part of it, Sam was talking about labor cost trends, I thought, and I didn't know if any of that included any anticipated impact from the new overtime rules in December as that goes into 2017, does that create the view that --

The overtime rules for us are very immaterial, and present not even around the error.

Okay, then my real question -- Your comments on the new cardiac bundle and what your approach has been with the orthopedic bundle. Are you just contracting with sort of best in caste post-acute providers in your markets and this will be capital light investment to coordinate the risk that you're assuming there? Just your comments on how you're approaching these.

Well, I think on the CJR, it varies by market a bit. We are trying to work with our physicians to identify the best course of action for our patients, whether that's the type of post-acute, how we interact within post-discharge from the hospital and so forth. And it's very, very early in understanding how impactful those are. As we transition, I mean, we just got the regs on the cardiac thing, it's 700 plus pages of regs I think. We haven't had a chance to study that yet.

I think the one nuance for us with cardiology versus the orthopedic joints, is we employ a large number of cardiologists across HCA and our ability to integrate with them may be a bit easier than it is in some respects with orthopedics, which we don't employ as much.

So we will just have to wait and see how that plays out. That's still a proposed rule. We don't know if, in fact, it will go into effect and what the final rules will be on the cardiac side, but we are prepared. We've invested in infrastructure at the corporate office, and in our divisions we've educated, we've put policies and procedures in place on the CJR and we will hopefully see where it goes over the next 12 to 18 months.

Gary, thank you. All right shot clock is on. We've got time for about two or three questions, quick ones.

Alright, next we'll go to Ana Gupte with Leerink Partners.

Hello, thanks, good morning. I had a question on the managed-care and just generally the industry trends around the link to lower-cost types of service. So when you had said that it was like 1.5% or something outpatient surgeries, the inpatient was somewhere in the same range. Can you give us color on the breakdown between the freestanding centers versus the outpatient departments and what the price differential is, and how that -- how much of a volume increase do you need to overcome the price differential? And is that also in addition to the makeshift government putting pressure on your pricing?

I'm not prepared to give pricing between the two units. I mean, ASC's are a bit less price, lower-priced in our hospitals and that's because of some of the infrastructure requirements that it takes to operate a hospital-based unit, capital requirements are different and so forth. Both components have about 50% to 55% of their volume being commercial patients, so outpatient business is predominantly a commercial-book business.

A number of our surgery centers have broader clinical capabilities and can provide the type of care that are hospital-based units, that others can't. They don't have the nursing, they don't have the backup, the physicians aren't comfortable operating on certain types of patients and so forth. So there's all these nuances that go into it.

Ambulatory surgery centers have been in our markets for decades and this dynamic has always existed and so we've got the right balanced approach, we believe, inside of HCA to be able to respond to physician needs, patient needs, payer needs, with our network and we continue to add to both.

Thank you, that's helpful.

Next we'll go to Sarah James with Wedbush Securities.

Thanks. You've been focused on growing the ASC's footprint and today spoke about the commitment to investing in outpatient. So if we take a step back and look at where you're putting capital to work, how do you see the acuity mix or mix of inpatient to outpatient changing for HCA over the next 5 to 10 years.

I'll say this, fundamentally the company has a strategy to enhance the clinical complexion of our facilities and by that I mean, advance into deeper capabilities. In many markets, we are adding service lines, I'll call it horizontally, where we are bringing on new capabilities in cardiovascular care, oncology, pediatrics, whatever.

And then vertically, we are deepening those capabilities inside of existing service lines, all intended on being able to keep a patient somewhere in the HCA system if they need deeper care and more complex care. So we support that out of our clinical services group and out of our service line group up here in Nashville, where we can bring technology, we can bring best practices, we can bring a specialized talent to support that.

So when I view the company's inpatient business, I anticipate it getting more acute and more complex over time. On the outpatient side, the companies had a very aggressive investment strategy over the last number of years. I think, Bill, our outpatient revenue is pushing 40% of our total, and so we balance out the $2.7 billion between inpatient capacity, outpatient surgical capacity, imaging capacity, clinical capacity for urgent care, and then also for emergency room, which is a big piece of our outpatient strategy as well.

So all of those pieces and parts are connected to really a balanced approach to building out our networks and being attractive to our patients and our physicians.

Thank you, Sarah. All right, 9:59, one more question.

Okay, we'll take our last question from Sheryl Skolnick with Mizuho for a follow-up.

Very kind of you. So it ducktails on what Sam was just talking about. You've made significant investments in big data and it's highly sophisticated, obviously this plays into all of what you are doing, but at some point, and maybe this is too long of a question to ask at this time of the call, but at some point can you help us to understand how the improvements you are making in the quality of care, the outcomes, the lives saved, and the changes you're making to the process will enable you to support higher volumes and better process in the future?

Milton, you wanna lead that?

Sure. Sheryl, you've hit on a subject that I think is very important to healthcare over the next 5 to 10 years and thereafter. And we are investing, and we have invested heavily in this because we see it as, I'll call it a game changer for healthcare. This is an area where I want to see HCA lead and I'm very excited about the early returns and what we're seeing. Again, we've invested in the clinical data warehouse.

You think about what's happened over the last several years with electronic health record and investments that HCA and other providers have made in moving now to a digital medical record. Now we have all this clinical information in a digital format and what do we do with it? And there's a lot that we can do with it, I'm going to ask Dr. Perlin to touch on a couple, but some things that we are doing around sepsis care, and really dropping mortality rates in our hospitals from sepsis is saving lives and it's really happening, it's happening today in our facilities.

And so there's examples like that, so it's, again, we are investing in not only terms of the technical side of that, but we are investing in the human resource side of that with hiring very talented data scientist to help us take advantage of this and then you think you move on from the structured data that we have to the unstructured data and that's a language processing and where we can move the needle there is, again, something for the future that I'm very excited about. So Dr. Perlin is here. John, why don't you give a little more detail on that area?

Thanks Milton. In essence, really we are at the point where we continue to realize the digital dividends of meaningful use. That means -- have always been very operations and science driven in its management and business decisions. Every aspect of our clinical care can be captured and we can understand that to drive better clinical and operational and business decisions.

As Milton mentioned, it's really the gateway to improving the care for patients in real-time in terms of sepsis, the ability to detect and even predict sepsis, number 11 cause of death in the country, number nine in hospitals, number three in all ICUs, it really allows us to do what Milton says, save lives.

In that process, it also allows us to drive our processes more efficiently in terms of labor, efficiently in terms of resources used to provide care and the supplies. It arms our MD's and care teams with the ability to answer questions and drive our clinical integration forward in the science driven fashion, as Sam eluded to, which is really a requisite for maximizing the margin that a current reimbursement really is the predicate for success in bundles in the future.

It's finally the doorway to really personalized and precision medicine, so it's really our mechanism to channel back the inevitable datastream that results from what we provide healthcare and use it to drive better clinical business to operations decisions.

All right, Sheryl, and everyone, thank you very much for your time this morning, we appreciate it. Look forward to following up with all of you.

That does conclude today's conference. We thank everyone again for your participation.