美國醫院公司 (HCA) 2016 Q3 法說會逐字稿

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

Today's conference is being recorded.

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

Please go ahead, sir.

All right, Kyle, thank you very much.

Good morning, everyone.

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

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

Before we 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 the 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, 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 third-quarter earnings release.

As you heard, the call is being recorded, and a replay will become available later today.

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

All right.

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

I trust most of you have had an opportunity to review our third-quarter results release this morning.

I'll make a couple of comments on the quarter, touch on a couple of other topics, and then turn the call over to Bill and Sam to provide more detail on our third-quarter results.

I'm very pleased with our overall performance and execution in the quarter.

We've continued to use our free cash flow to invest in our markets to support future growth, and we have returned cash to shareholders through share repurchase.

Let me touch on the results for the quarter, at a high level.

The Company experienced a solid quarter, with revenues in the third quarter totaling $10.27 billion, a 4.2% increase in the prior year, driven by 1.5% equivalent admission increase, and a 2.7% net revenue per equivalent admission increase in the quarter.

Net income attributable to HCA Holdings totaled $618 million, an increase of 37.7%, while earnings per diluted share totaled $1.59 per diluted share, or $1.61 per diluted share, before gains on the sale of facilities, losses on retirement of debt, and legal claim costs.

Earnings per diluted share for HCA Holdings before gains or losses on sales, losses on retirement of debt and legal claims costs increased 37.6% compared to the prior year.

As noted in our release this morning, the Company also recognized reductions in its provision for income taxes due to the adoption of a new accounting policy on equity award settlements of $11 million or $0.03 per diluted share, and $51 million or $0.13 per diluted share from the completion of IRS review of the Company's 2011 and 2012 federal income tax returns.

Adjusted EBITDA totaled $1.957 billion in the third quarter, as compared to $1.815 billion last year, an increase of 7.8% over the prior-year period.

We had another solid quarter for cash flows from operations, resulting in $1.206 billion compared to $1.101 billion in last year's third quarter, a 9.5% increase.

We deployed $712 million for capital expenditures, and $355 million to repurchase 4.637 million shares.

We have repurchased a total of 29.064 million shares in 2016, at an average cost of $76.16 per share, and we had $390 million remaining on our $3 billion authorization at September 30, 2016.

We expect to complete the remaining authorization by the end of the year.

Let me provide an update on recent Hurricane Matthew on our Florida and South Carolina facilities.

We experienced some minor disruption leading up to and during the storm; however we came through the event without any major issues.

I commend our entire team for the preparation and planning in anticipation of the hurricane, which minimized any disruption of service to our patients.

And yesterday, we announced an agreement with the University Hospital Authority and Trust for the early termination of HCA fleets at the Children's Hospital at Oklahoma University Medical Center and also the termination of a joint operating agreement.

In addition to the termination, HCA will transfer ownership of its hospital operations in Oklahoma, which includes two other hospitals, to University Hospital Authority and Trust.

Under the agreement, HCA will receive $750 million in consideration, and the transaction is expected to be completed in the first half of 2017.

So with that, let me turn the call over to Bill and Sam for additional details on the quarter.

Great, thank you, Milton, and good morning, everyone.

I will add to Milton's comments and provide more detail on our performance and results for the third quarter.

As we reported, in the third quarter, our same-facility admissions increased 0.7% over the prior year, and equivalent admissions increased 1.3%.

Year-to-date equivalent admissions were up 2% over the prior year.

Sam will provide more commentary on volume in a moment, and I'll give you some trends by care class.

During the third quarter, same-facility Medicare admissions and equivalent admissions increased 1.8% and 2.5% respectively.

This includes both traditional and managed Medicare.

Managed Medicare admissions increased 3.4% on a same-facility basis, and represents 33.5% of our total Medicare admissions.

On a year-to-date basis, Medicare equivalent admissions were up 2.2% over the prior year.

Same-facility Medicaid admissions and equivalent admissions increased 2.3% and 3.4% respectively in the quarter, fairly consistent with our recent trends, and our year-to-date growth of equivalent admissions of 3.2%.

Same-facility self-paid and charity admissions increased 0.7% in the quarter.

These represent 8% of our total admissions, which was unchanged from last year's third quarter.

Year to date, our same-facility uninsured admissions were up 5.2% from the same period last year.

Managed care and other, including Exchange admissions, declined 1.8%, and equivalent admissions declined 1.4% on a same-facility basis in the third quarter.

However, on a year-to-date basis, same-facility managed, other and Exchange equivalent admissions remained slightly up.

Same-facility emergency room visits increased 2.7% in the quarter, compared to the prior year.

Same-facility self-paid and charity ER visits represent 20.1% of our total ER visits in the quarter, compared to 20.5% last year.

On a year-to-date basis, same-facility emergency room visits have increased 4.6%.

Intensity of service, or acuity, increased in the quarter, with our same-facility case mix increasing 4.7% compared to the prior-year period.

Same-facility revenue per equivalent admission increased 2.7%.

Managed care and other, including Exchange revenue per equivalent admission, is trending consistent with prior periods, and adjusted for certain items, it grew approximately 6.5% in the quarter, and 6.7% year to date.

Same-facility charity care and uninsured discounts increased $639 million in the quarter compared to the prior year.

Same-facility charity care discounts totaled $1.042 billion in the quarter, an increase of $118 million from the prior-year period, while same-facility uninsured discounts totaled $3.295 billion, an increase of $521 million over the prior-year period.

Now turning to expenses.

Expense management in the quarter was very good, and led to a 70 basis point margin expansion, as compared to the prior year.

Same-facility operating expense per equivalent admission increased 1.9%, compared to last year's third quarter.

Our consolidated adjusted EBITDA margin was 19.1% for the quarter, as compared to 18.4% in the third quarter of last year.

Same-facility salaries per equivalent admission increased 1.4%, compared to last year's third quarter.

Salaries and benefits as a percent of revenues decreased 80 basis points compared to the third quarter of 2015.

Same-facility supply expense per equivalent admission increased 1.5% for the third quarter compared to the prior year, and supply cost as a percent of revenue improved 20 basis points versus prior year.

Other operating expenses as a percent of revenues increased 30 basis points from last year's third quarter to 18.5% of revenue, primarily reflecting an increase in year-over-year professional fees that we discussed on our last two calls.

Let me touch briefly on cash flow.

We had another strong quarter, with cash flows from operations just over $1.2 billion.

Year to date, cash flows from operations were $3.954 billion, which is a $778 million increase or a 24.5% growth from prior year.

Cash flow from operations has benefited by $129 million on a year-to-date basis, due to the adoption of the accounting policy around the excess tax benefit related to the settlement of equity awards.

At the end of the quarter, we had approximately $2.050 billion available under our revolving credit facilities.

Debt to adjusted EBITDA was 3.86 times at September 30, 2016, compared to 3.85 times at December 31, 2015.

I also want to highlight our earnings-per-share results.

For the quarter, our diluted earnings per share, excluding losses on retirement of debt, legal claim cost and gains or losses on sales of facilities increased 37.6%, to $1.61 per diluted share from $1.17 in the prior-year period, as indicated in our release, EPS for the quarter does include a $0.03 benefit to adopting the new accounting policy and a $0.13 benefit from the IRS exam settlement.

These strong cash flows, balance sheet position and EPS growth results highlight an important strength of the Company.

Let me touch briefly on health reform.

Health reform activity continued to grow over the prior year in the quarter.

In the third quarter, we saw approximately 13,000 same-facility Exchange admissions as compared to approximately 11,500 in the third quarter of last year, for a 13% year-over-year growth.

You may recall we saw about 13,300 Exchange admissions in the second quarter.

We saw 49,000 same-facility Exchange ER visits in the third quarter, compared to 40,700 in the third quarter of 2015, and 54,000 in the second quarter of 2016.

So overall, these reform trends are tracking in line with our expectations, and have been very stable over the past several quarters.

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 markets, and wide-ranging growth across the various facilities and service lines that make up our business.

For our domestic operations, on a same-facility basis, 10 of 14 divisions had growth in admissions, 10 of 14 divisions had growth in adjusted admissions, and 12 of 14 divisions had growth in emergency room visits.

Freestanding emergency room visits grew 12.5%, and accounted for approximately 40% of our overall ER growth.

Hospital-based emergency room visits grew 1.8%.

In addition to the solid portfolio performance across our 42 markets, the Company's growth across its diversified service lines was also strong.

For domestic operations, on a same-facility basis, inpatient surgeries grew 0.9%, which increased surgical admissions to 28.6% of total admissions in the quarter, an increase of 100 basis points as compared to last year.

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

Outpatient surgeries were slightly down in the quarter, about 0.3%.

Hospital-based outpatient surgical volumes declined 0.9%, while volumes increased 0.4% in our freestanding ambulatory surgery division.

This softness was felt across multiple service lines, and across many markets, and we were not able to identify any particular issues that drove this softness.

Behavioral health admissions grew 1.5%.

The issue with physician staffing shortages that we discussed last quarter was still the primary driver of the slower growth in this service line.

Three of our largest behavioral hospital units had staffing challenges, and without them, the Company's admits in this service line would have been up 4.5%.

Rehab admissions grew 4.3%, which was an acceleration in the growth rate, as compared to the first half of the year.

Deliveries were down 0.9% in the quarter.

Again, this decline was concentrated in Medicaid deliveries.

Neonatal admissions increased 1.5%, which is an improvement over the growth rate in the first half of the year.

Cardiology procedure volumes grew approximately 4%.

Trauma volumes grew almost 15%.

Observation visits were up 5%.

And finally, the Company's urgent care visits, in total, grew 11.7%.

The Company currently has 71 centers.

At this time last year, we had 50 centers.

All in all, we had another good quarter of volume growth; however the overall growth rate was not as high as we had planned.

It is important to note that the third quarter last year was also a relatively strong volume quarter, and presented a difficult comparison with inpatient admits up 2.9%, and adjusted admissions up 3.6%.

We believe this deceleration in the growth rate was primarily attributable to the following two reasons: First, overall demand growth in inpatient services has moderated.

When we study market data from the fourth quarter of 2015 and the first quarter of 2016, inpatient demand in our markets grew 1.7% for this six-month period.

This rate was down from the previous five quarters' average growth of approximately 3.5%, but it is generally consistent with our longer-term view of inpatient demand growth, which is approximately 2% annually in HCA markets.

Before I get into the details on the second reason, I want to indicate that the Company grew its market share, albeit at a slower pace for the 12 months ended March 31, 2016.

65% of our markets gained share during this period, as compared to 68% of our markets in 2014.

The second reason can be explained by growing competition in certain areas of our business.

In particular, a growing supply of freestanding emergency rooms by independent companies and health systems in various Texas and Colorado markets has had an impact on emergency room visits, and some downstream admissions.

Also, in a couple of our Florida markets, we continued to be challenged with Medicare Advantage health plans that classified emergency room patients as observation patients instead of inpatient admissions.

Overall, we believe HCA has a comprehensive growth agenda, and our execution remains strong.

We continue to invest significantly in our growth agenda with increasing capital spending, coordinated marketing strategies, and multiple human resource programs, including medical staff development.

In sum, we believe the Company has solid growth prospects across its uniquely diversified portfolio of markets and service lines, and we believe our local provider systems are well positioned to capitalize on these opportunities.

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

All right, Sam, thank you very much.

At this time, Kyle, if you will come back on, we'll move to Q&A.

I do encourage everyone -- I know we have got a lot of folks on the call today, And as usual, please try to limit your questions to one at a time.

Thank you.

(Operator Instructions)

Sheryl Skolnick, Mizuho Securities.

Thank you for mentioning that this was a tough comp, and a tough quarter, from that perspective.

I think folks have maybe forgot to put it in that perspective.

But I'm curious, since you're seeing this moderating in growth, one of the ways you might deal with that is by repositioning the portfolio to perhaps focus your capital spending, and your capacity expansion efforts in more attractive markets.

Was that behind the Oklahoma transaction that you announced at a curious time last night, just before earnings, or was there some other reason?

And if you could explore that a little bit, and what the opportunities with deploying capital, I would appreciate it.

All right.

Sam, do you want to pick that up?

Thanks, Sheryl.

Oklahoma City, let me just give a little background, and then I'll relate it to your questions, I think, Sheryl.

We had a relationship that dates back to 1998 with -- I'll say it's the University of Oklahoma.

It's a more complicated structure than that because of how the state had to do a transaction with us.

But we've had this relationship since 1998, and when the hospitals came together, there were a lot of challenges, both for HCA and the University hospitals.

We look at where we are today, which is almost 20 years past.

This has been a remarkable success, from I think everybody's standpoint, and a very innovative public-private partnership.

And so there's been a lot of investment, a lot of new programs, market share gains and so forth, that have really benefited the system.

The way the deal was structured, it was structured as a lease, and we were in a situation, as was the hospital there, where it needed additional capital.

And unfortunately, the other side was not in a position to extend the lease in any significant way that allowed us to get comfortable in making the kind of investment that needed to be made.

So it was felt by both parties that it was better to go ahead and start the unwind now, so it could be orderly for both sides of the equation, and that's where we wound up announcing this transaction yesterday.

It was a complicated deal to get into, and a complicated deal to get out, because it was very intricately structured.

So that does allow us in the context of what we needed to make as an investment there, coupled with the type of lease that we had, to look at repositioning the capital to be a source for whatever we wanted to do, whether it is more capital expenditures or other components of our capital allocation strategy.

And so it does fit into that, and I think that's part of what we've considered, as we went through our negotiations and our strategic analysis of this particular market

Sam, thanks.

Milton, do you want to add something?

But let me just add what Sam described, the structure of this particular arrangement was unique to OU, and to Oklahoma City.

Our other partnerships that we operate do not have the same structure.

So it is -- it was a very unique structure, how that deal was put together back in 1998, and I just want to make it clear that other partnerships do not have that same structure.

All right.

Thank you, Sheryl.

Sure.

Kevin Fischbeck, Bank of America.

I want to go back to your comments around volume growth moderating.

The demand growth in your markets moderating, and it sounds to me like you're saying it's moderating back to what you see as long-term normal numbers, but there's a lot of concern around surveys, et cetera, around Q3 volumes and thinking about what the long-term volume is.

What's your degree of visibility or confidence that 2% is the right market demand in your markets, based upon where things have been trending the last several quarters?

All right, Kevin.

Thank you.

Sam, I think we will pitch that back to you.

We go through a process annually, where we conduct a forecast of future demand for HCA market, based upon population trends, on macro economic factors, on aging, and so forth.

So that's always a fundamental approach to our business planning process.

In addition to that, we compare historically to a longer view, to see what the patterns have been in our markets on a historical basis, and we try to merge those two views into our Company thinking and Company view right now, and that's where we get to the 2% demand on the inpatient side.

We think outpatient demand has a little bit more growth than that.

So that process is consistent, and that's where we have landed on our view.

There is nothing to suggest from one quarter in this particular year, that particular view is off.

And so we're relatively confident today.

We haven't finished our analysis for all of 2017 and on, that anything materially has changed.

I think one thing that's positive in the overall demand is that commercial demand continues to be reasonably solid inside of the HCA's markets in these two periods that I discussed in total.

And so that's an encouraging metric that suggest our portfolio of markets still has reasonable growth on the commercial side.

Obviously there's puts and takes to that, but that particular metric I think gives us some confidence as well, that our markets are still relatively healthy, and present a reasonable opportunity for growth for the Company.

All right.

Kevin, thank you.

Josh Raskin, Barclays.

I was curious when you talked about the freestanding ED growth, and then your growth also in urgent care centers.

It sounds like that was up 40% or so.

You are growing both sides.

How do you think about that as both a threat and opportunity, and how do you decide within a market if you want to open up a freestanding ED versus an urgent care center, other than the obvious regulatory and certificate of need if necessary et cetera.

All right.

Josh, thank you.

I think you are winning the lottery here, Sam.

Well, we have evolved our freestanding emergency strategy over the past five years.

I think five years ago, we had maybe 12 to 15 freestanding emergency rooms.

We have 56 that are operational today, and I think by the end of 2017 or early 2018, we will be north of 70.

And in that particular strategy we feel pretty good about how we placed those.

We see the urgent care as an additional wraparound, if you will, our freestanding emergency room strategy, where there are certain components of certain markets where urgent care is the best answer, because of either competitive hospital systems or other freestanding emergency rooms, and it provides a component that wraps around our freestanding emergency room or hospital emergency room strategy.

So there is a blend of what the right facility is for the right situation.

This population.

There's traffic.

There's location of other hospitals, and other freestanding emergency rooms.

And we go through this process of mapping out the market, and determining what exactly is the right fit, and how we go about building this network further.

In some respects, we tried to build an urgent care strategy around our emergency room strategy, which is built around our hospital strategy.

So it's almost a concentric circle of facilities that create a fairly broad HCA network in these large markets, allowing our patients to enter the system in different forms, or different fashions.

And also creating relatively favorable price points, if you will, for our payers, where they can direct as they feel they need to direct, but keep them in the HCA system.

So it's hard to give you a specific, because we have to look at the individual markets, but those are some of the general approaches that we take.

Okay.

Thanks.

Michael Mitchell, Evercore ISI.

Can you talk about your exposure to health plan Exchange exits in your markets, and just in general, if there's any change in your level of network participation in Exchanges for 2017?

All right, Michael.

Thank you.

Bill, do you want to -- why don't we have Sam make a couple comments about it.

Obviously, a lot of movement in Exchanges in our markets, as you see in most of the markets across the country.

That being said, we still expect product to be available in our markets, and probably multiple products in our markets, and we're really watching to see how this open enrollment period develops, to see how the lives move around as a result of some of the plans pulling out.

Overall I think on a material level, HCA continues to be very well positioned in Exchanges.

I expect that we will see some growth possibly in that Exchange business even into 2017.

But obviously there is some disruption in the marketplace, and we are watching very closely.

And I don't know --

I would just add in, there's clearly a lot discussion around the plan participation and premium adjustments, and what that might do to enrollment.

It is early for us to kind of give estimates for 2017, but we were encouraged by recent reports that they are expecting some increase in Exchange enrollment.

We'll have to see where that enrollment is coming from for next year to refine our estimates.

I also believe it's important to know, and we've shared this in various investor meetings during the course of the year, but we've got data that suggests there's almost four million people in our markets that are eligible for subsidies that have yet to participate.

And so we're somewhat optimistic that some of those remaining eligible people may find their ways into enrollment.

In terms of plan exiting, most of our major markets, if not all of our major markets there's another plan offering to catch those lives.

So again I think we're optimistic that health reform will continue to contribute to the company.

All right.

Thanks, Bill.

Thanks, Michael.

Ralph Giacobbe, Citi.

Just a quick one first.

Any prior-period revenue that came through in the third quarter?

And then separately, just the slowing managed care volume, just any commentary around what may be driving that, and perhaps how to reinvigorate that category?

Thanks.

Ralph, I'll take the first.

There was no material out of period revenue adjustments in the third quarter and Sam, on the managed care volume?

I'll say this in general.

Obviously, competition for commercial business is the most intense in all of our markets.

Everybody understands the implications of the commercial book.

And so there's significant competition in that particular area.

But what HCA is doing structurally to compete in those environments is similar to what we just talked about.

How do we create outreach into the commercial segments through outpatient facilities; through freestanding emergency rooms, through growth in our outpatient surgical platforms?

We can start to develop relationships with our patients in a way that allow them to be connected and loyal to the HCA system.

Additionally, with our physician strategies, we're very targeted and working with our physicians who have commercial books to business to expand their capabilities, allowing us to reach further into those particular arenas, and hopefully drop downstream business.

And then finally, working with our health plans to come up with the ways to help them grow in a way that benefits our system.

So I think our overall approach is built around the basics of our growth architecture, including where we deploy capital expenditures.

We are focusing our capital on those facilities that have great opportunities in commercial markets.

We're in outpatient facilities in commercial markets, so that's a part of our screening, if you will for deploying capital, because the return prospects are greater in those particular scenarios.

But our competitors do that too, so it's a very competitive landscape and there's movement in and out periodically from who is gaining and who is losing in those environments.

But we are very comfortable with the approach and how we have deployed it.

We think there are new opportunities with customer relationship management through digital technologies, patient navigation, and other ways to differentiate HCA further, and we're continuing to invest in those initiatives as well, and we think we've got opportunities to respond to this dynamic and this market as we move forward.

Ralph, thank you.

Scott Fidel, Credit Suisse.

Interested if you could talk about sort of the underlying wage inflation trends that you're seeing in the third quarter.

And clearly looks like expense management overall was quite strong, but just interested in sort of the underlying inflation trends that you're seeing relative to earlier this year.

Thanks.

All right.

Thank you, Scott.

We are not seeing really change -- any substantial change in our wage rate of inflation.

I think as we've been saying over really the last few quarters, that we have pockets of wage pressure from time to time, we're always monitoring the marketplace.

We make those adjustments that's in our run rate, and nothing in particular for this quarter, Sam, that I see in the wage inflation, that's any different from recent trends.

And I would add that our cost per FTE, if you look at FWB per FTE which includes benefits, contract labor and wages as a whole, was actually at its lowest point on a year-over-year growth rate in the third quarter.

So we have seen moderation in contract labor.

We have, as Milton said, made these adjustments ongoing to different markets and different situations as they surface.

And we are at a pretty good point, we believe with wages.

There are clearly some still pressure points across the company, but it's not in all 42 markets, and it's not requiring us to do something uniquely across all 42 markets.

All right.

Thank you.

Thanks, Scott.

A.J. Rice, UBS.

I know over the next month or two, you are going to sit down with field operating people, and thinking about budgets.

But at a high level, and obviously not asking for specific guidance but more broad thoughts about what are the big variables?

Sounds like a lot of things you feel like you have pretty good trajectory, but as you think about next year, are there any -- broad headwinds, tailwinds, that people should think about or keep in mind?

Figuring out volumes is always one source of volatility, but I guess you're saying probably around 2% is the way to think about at least the entire company.

But how about more broadly away from volumes.

Any headwind, tailwinds that you highlight?

All right, A.J., thanks.

Milton?

Obviously -- A.J., as you just stated, we are not prepared to give 2017 guidance this morning.

We will do that on our next call.

But we've been, I think, pretty clear about how we think about the business.

And volume is a big variable obviously in our business, but as Sam just described, we have our processes and ways that we look at the future, and we've been very clear that we think in our markets over the longer term, it's more about 2% is the outlook and we've been very public about that.

You think about the pricing side of our business, we've got good visibility into our managed care portfolio, our managed care book, and a substantial portion of 2017 under contract with rates and structure similar to what we've had the last couple of years.

So pretty stable outlook there.

And then wage inflation and overall inflation in our markets, the outlook is quite similar for what we've been seeing in the last couple of years.

We just talked about wages and no particular broad-based pressure there.

So we feel good about where we're headed going into 2017 coming out of this year, but we've got a lot of work to do, as you said, over the next two months, to put the details around all that.

But our long-term guidance of its 3% to 5%, 4% to 6% EBITDA growth, we've been very public about our expectations and don't see changing that this morning.

The other thing I would add is I think we have good visibility on Medicare, and we don't see any material changes in the Medicare revenue outlook.

Thanks, AJ.

Gary Lieberman, Wells Fargo.

Vic, maybe this is one for you that any thoughts on additional states here expanding Medicaid, and how the outcome or different outcomes of the election might impact that?

Gary, I think most everyone would agree if the Republicans gained control of the White House and what have you, there'll be pressures and probably less opportunities for states to expand Medicaid.

If the Democrats are in place there, I do believe that there will be consideration, hopefully, maybe see some additional incentives.

Maybe a little more flexibility in bringing some states to bear.

And you would hope that some of the states that have an expanded Medicaid will look at this as ACA is not going away.

There is money there that can help our states and get people insured, and so I'm not about to say every state goes, but I think you'll start to see -- hopefully, you'll start to see some movement.

Any states where you're more optimistic than others?

But you know what?

It's hard to point out states.

I mean, I sit here in Tennessee and I'm hoping Tennessee will go there, because I know at one point our governor tried.

And again, you've got the issues not only the governors don't have total control, but you have a Republican Governor here that would have like to expand it, and his state legislature wasn't letting him do it.

You would hope that maybe the ball could move there.

There are half a dozen other states that might be in similar positions, that might consider it.

Great.

Thanks a lot.

Justin Lake, Wolfe Research.

Sam, you talked about inpatient demand, 2% in your markets, and I was just curious what you would project for adjusted admission growth, given that with that number?

And can you give us your view on sustainability of your 20 or 30 basis points of market share gains target as you go into 2017, given your earlier comments here.

Thanks.

All right.

Sam.

As I indicated, Justin, the outpatient side of the equation, we think is growing slightly faster than the inpatient side.

And we've estimated over time that there may be 50 basis points of add-on, if you will, to the adjusted admissions factor.

So it puts you in that 2.5% zone, as maybe a demand growth for adjusted admissions.

Obviously the emergency room is a big piece of that.

Outpatient surgery is the second largest piece of that component, and then it drops off from there, where it is not as segmented as those two, when you start looking at the outpatient market.

With respect to our market share trends, historically, you're correct.

We've tended to average 25 to 40 basis points per year of Company-wide market share growth.

That has slowed a little bit, because we've seen more suppliers in certain components of our business, as I indicated on my commentary.

And then we've seen other components of our strategy, if you will, replicated.

So we are having to up our game, and that's what we're doing.

Our teams are challenged with coming up with innovative ways to deal with the competitive dynamics that are taking place within our markets.

Again, we're leveraging great ideas from one market to the other, to help the Company stay ahead of our competition where we can.

And we think some of our outreach efforts, our urgent care strategy, and our very effective position development strategies will continue to help the Company stay competitive, and hopefully put ourselves in a position to sustain our market share gains as we move forward.

It's really difficult for me to say exactly how one year, the next year is going to play out, because I don't have visibility into exactly what our competitors are going to do.

But largely our competitive landscape is not significantly different than what it was in the previous year, so I think there could be some incremental movements from one market to the other, and we just need to be prepared to deal with that, and I think we are.

And we're doing everything we possibly can to sustain that performance.

All right.

Thanks, Justin.

Frank Morgan, RBC Capital Markets.

Sam, you gave some comments earlier about the different regions, but 10 out of 14 with positive growth.

But any more detail, geographical color, parts of the country that are doing better or worse?

And then any parts of the country where you're seeing any pressure on the supplemental payment programs?

Thank you.

All right.

Sam, you want one and Bill two?

I think the statistical challenges that we had with admissions and so forth were somewhat acute in East Florida division and the West Florida division, but that was mostly attributable to the Medicare Advantage observation issue.

The number of patients in our hospitals in both of those divisions were up when I bundle the two, but when it comes to admissions statistics, then it obviously looks like those two divisions had challenges, but when we get underneath that, we don't see that a significant issue.

When you look at Texas compared to Florida, the State of Florida is a little more in a growth mode, as far as the overall market, slightly up, but Texas continues to be a very good market for us, with respect to overall growth of our markets, and so forth.

We have had a little bit of challenge in a couple of Western markets because of some dynamics with some of our competitors that got back into health plans, when previously they weren't in certain health plans.

So we've seen some our physicians go back to our competitors.

But all in all, 10 out of 14 is very good.

And just on the admissions side, to give you some perspective, the four that were down, one of them was down 0.5%.

One was down 1%.

This is admissions.

One was down 1.5%, one was down 3%.

The one that was down 3% had the most Medicare Advantage issues.

On an adjusted admissions basis, one of them was down 0.2%, one was down 0.4%, and one was down 1.3% and 1%.

So we're talking almost 14 out of 14, and when we normalized for some of these things, it would of been a little different number.

So that's part of how we are looking at it, Frank, and we don't see anything unique in any one particular market that's really compromising the Company in any significant way.

Bill?

Real quick, you know our largest supplemental payment program is in Texas, with the Texas waiver program.

That is scheduled to continue through December of 2017.

I know there's ongoing discussion between the state and HHS, how that may be our adjusted post December 2017.

So it's too early for us to call, but it looks like it's stable through next year.

All right.

Thank you.

Brian Tanquilut, Jefferies.

A question on capital deployment.

So your cash flows remain really strong.

You're getting $750 million from Oklahoma.

What are you seeing in terms of where acquisitions for next year?

What areas, and then how are you thinking about returning capital back to investors, both buybacks and the possibility of a dividend?

Thanks.

All right.

Bill, do you want to lead on that?

Sure, Brian.

Well, we're at that time of the year where we're working on our plans, and as mentioned in my comments we'll finish our current $3 billion share repurchase authorization by the end of this year.

And we will have substantial free cash flow next year.

And as we think about capital allocation, think about our cash flow from operations, probably somewhere around $5.3 billion to $5.5 billion this year.

As we think about that, that cash and the allocation of the capital, the first thing we do is reinvest back in our existing markets, and this year, that will probably be about $2.7 million.

I would expect next year would be a similar amount, maybe up a little bit, but around that same number.

So that leaves us substantial free cash flow that obviously we've used for acquisitions.

We always have a pipeline.

We're looking for opportunities, most recently the acquisition opportunities have been tuck-in acquisitions, complementary to our existing markets, or outpatient acquisitions like urgent care that Sam has talked about.

And we'll probably to continue to see those opportunities into the next year, and we'll be well positioned to take advantage of them as they come to us.

Larger acquisitions, they're always a possibility.

We remain optimistic we'll have some good opportunities, but as you know from recent years, those are hard to predict when they will happen.

But again, we remain with the balance sheet and the financial capabilities to take advantage of those if they present.

And we'll always be looking out for those opportunities.

And that leads us, then, returning cash to shareholders, and I don't think any of these are mutually exclusive.

I think if you look at HCA, we've had a very diversified approach to our capital allocation.

I think we'll continue to have a diversified approach to capital allocation.

And we will be looking at deploying additional cash to shareholders in 2017.

We will be reviewing the possibility of a dividend.

We'll have to think that through.

If we decide to do it, we'll probably talk about that in our next call.

But we'll continue, I think, to be a repurchaser of our stock.

We've been very pleased with investing our free cash flow back in our Company's stock.

We think we have been doing that for a number of years since we've been public again, and it's been, I think, a great return on investment for our shareholders.

So that's something to think about it and we'll have more details on exactly what we'll do in 2017 when we have our fourth-quarter call and release our 2017 guidance.

Thanks, Brian.

Matt Borsch, Goldman Sachs.

Yes.

Thank you.

Maybe just if you could comment on the Medicare advantage observation issue.

How that's come up.

Has it been specific to one payer or one or two payers, or has it been across the board?

What do you think has triggered that, and how you are dealing with it?

All right.

I think Sam, you want that one?

Yes.

The issue is more than one payer.

That's the first point, and it's more than one market.

It's mainly in the Florida markets, like I've said, but we have seen situations like this before in other markets in Texas.

And I think you have to deal with it in really three ways.

One, we have to work with the payers to come up with a process that doesn't put us in a situation where we're disputing each other's classification of patients, and we're doing that.

We're having active dialogue with the payers now on the concerns that we have.

We're listening to their issues, and seeing if we can find a resolution there.

The second thing we can do, when we disagree, we dispute and we go through a dispute resolution process to try to resolve it.

That's obviously a little bit more of a protracted process.

And then the third thing that we do, if we can't reach a resolution on either one of those steps, is we work with our medical staff to establish what we believe to be appropriate clinical protocols and require that those protocols be processed, if you will, appropriately by physicians who are making those decisions.

We have done that in some instances, and that's allowed us to get through this particular situation.

The economics are not significantly different between observation and inpatient in some payer contracts, but others it can be, and that's where we have to be, again, very appropriate in how we respond to it.

But those are some of the approaches, and we continue to work through those in this particular situation that we have, primarily in Florida.

That makes sense.

Thank you.

Whit Mayo, Robert W. Baird.

I don't think I've heard much of an update around the HCA physician strategy in some time, and I think you've aligned that some medical schools in the past year, particularly in Florida.

Just curious if there's any new strategy around physicians, G&E programs, anything new that you're developing, that you can share?

All right.

Sam, do you want that one?

The physician strategy for the Company, I think, has evolved significantly over the past five or six years.

Where we have grown our active medical staff Whit, by about 2% to 2.5% per year, we have roughly 38,000 physicians who are active participants on HCA's medical staffs across all of our entities.

Of those 38,000, about 4,000-plus are employed by the company.

A split between primary care and specialists in that particular category.

But what we have done structurally is evolved our approach to interacting with our physicians, and providing them voice in our facilities, creating efficient and clinically capable institutions, and really showing our physicians that we can grow the practices for them in a way that meets their objectives.

And I think that's the HCA way, if you will, around our physician approach.

We have evolved, as I indicated over the five years, and we believe it makes sense in a lot of our markets to advance medical education training, and we have added graduate medical education programs across the company over the last year, and we will continue to invest in additional graduate medical education programs.

That is providing an opportunity for us to respond to market needs where there are physician shortages.

It's also creating opportunities for us to improve our operations within our facilities.

And then, finally, it's addressing potential strategic issues in allowing us to generate physicians who can support our service line development and our overall growth agenda.

So we're very excited about where we are with our graduate medical education program.

We have consolidated that division into our physician services group under Mike Cuffe, who has deep experiences with that, and he and his team are working to bring about best practices to create academic curriculum that can be scaled across the organization, and we think this is going to be a unique model that makes for a very competitive and responsive graduate medical education solution for many individuals who want to go down this path.

All right.

Thanks.

A couple more questions.

Ana Gupte, Leerink Partners.

My question is on the other two components of your growth model.

The volumes you say are 2%.

It looks like the mix shifting to lower priced service sites is going quite aggressively, and there's price discounting with mandatory bundling.

What are you thinking about on pricing growth?

And then on sustainability of bad debt, that was a pretty important component of your growth for this year.

All right.

Bill?

I'll give it a start.

So our pricing, if you look at our revenue per equivalent admission, has been very stable over the past quarters and years.

We anticipate 2% to 3% growth of NRAA, we saw 2.7% this quarter, and it's fairly consistent for the past several quarters.

So as Milton mentioned, we've got pretty good visibility into our contracting position for next year.

Couple that with our program investments, and I think that's a good stable range for HCA.

Bundled payments is being initiated.

We participate in that, but it's not yet really a material factor that alters the revenue profile for HCA at this stage, but I think we will continue to see more of that going forward.

And on bad debts, our uncompensated care trends have also remained very stable.

You look at our uninsured volume transfer this quarter, 5% on a year-to-date basis, which is lower really where we anticipated them falling out at, in the high single digits.

So I really characterized that overall environment for HCA as very stable.

Good.

Thanks, Bill.

Thanks for the color.

Gary Taylor, JPMorgan.

Maybe just a little bit of a follow-on.

I just wanted to ask about your view on sustainability of margins.

I think you began the year, you upped your long-term EBITDA growth forecast to 4% to 7%, but now we've had a few quarters where the revenue alone is at the lower end of that.

And to get into that EBITDA growth forecast, you have to see some margin expansion.

It seems difficult with revenue at the low end.

So can you just talk about your view of sustainability of the Company's current margins as you move out the next couple of years?

All right.

Thanks, Gary.

Milton?

Let me make a couple comments, but Bill may have some thoughts too.

Gary, as you know looking at our margins over the last several years, it's been very stable.

Somewhere around the high teens level, close to 19% or above 20% And so right now we're near 20%, and we're running at the low end of our revenue expectation, which is in that 4% to 6% range.

So I'm very, very pleased with the team's execution in terms of this quarter, to have EBITDA growth just under 8% off just over 4% net revenue growth is a real compliment to the execution.

I want to give that compliment to the team.

And I think as we go forward, that's the outlook we have.

We think in this sort of inflationary environment that we're in, if we can grow revenue, we're at the low end of our expectations, our goal is to maintain margins.

If we can move to the high end, we think there could be some opportunity for margin growth.

From time to time, we're making investments for the future.

We're investing in programs like trauma.

We're investing in physician programs that Sam touched on, and a lot of those investments have to run through the P&L, and not just on the balance sheet.

So we have been making those investments, they're in the run rate, and we're going to continue to make those, because really it's our future, and it's going to allow us to continue to grow.

So from time to time, we may move around a little bit with that.

But I feel like as an objective and a long-term outlook, I think our margins are at a very good level, but I think if we can grow our revenues to high end, there's still some opportunity, I think, for margin growth.

Thanks, Milton.

We have time for one last question.

Lance Wilkes, Bernstein.

Two quick questions on your managed care contracting trends.

I was interested in how much narrow network growth you're seeing, and how important that's becoming, going into 2017 for you?

And then on comparably, what increase are you seeing in your risk-taking or capitation, or other sorts of arrangements with managed care?

All right.

Sam, do you want to conclude with this one?

The narrow networking issue is most applicable to the Exchange contracting, and not to the overall broader commercial book.

So Exchange volume builds about 2%, 2.5%.

I would say a component of that, not all of that, is connected to narrow networking, and those type of structures, and that's not really gaining ground significantly on the larger commercial book.

With respect to the Company taking risk and so forth, we do have some elements of risk-taking.

It's predominantly on a physician practice side, and not on the hospital side of the business.

So it's a very small piece of the Company's overall revenue, but more inside of our physician component, then it is inside of our hospital component.

And that's where our contracts are really positioned in the next two to three years, and that seems to be what our payers are asking of us, and what we think is right for the Company.

All right.

Sam, thank you.

Lance, appreciate it.

Thank you, all, for participating today, and look forward to seeing you soon.

And this does conclude today's conference call.

Thank you all for your participation.

You may now disconnect.