美國醫院公司 (HCA) 2017 Q1 法說會逐字稿

Welcome to -- good day, and welcome to the HCA First Quarter 2017 Earnings Conference Call.

Please note that today's call is being recorded.

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

Please go ahead, sir.

Amelia, thank you.

Good morning, everyone.

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

With -- here this morning, our Chairman and CEO, Milton Johnson; Sam Hazen, President and Chief Operating Officer; and Bill Rutherford, our Chief Financial Officer.

Before I turn the call over to Milton, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations.

Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today.

Many of these factors are listed in today's press release and in our various SEC filings.

Several of the factors that will determine the company's future results are beyond the ability of the company to control or predict.

In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements.

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, 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 first quarter earnings release.

This morning's call is being recorded, and a replay will be available later today.

With that, I turn the call over to Milton.

All right.

Thank you, Vic, and good morning to everyone.

We appreciate your interest in HCA.

And as you saw from our release this morning, our first quarter earnings results were consistent with the preview we issued on April 17.

I'll make a few comments on the quarter and recent acquisition activity and then turn the call over to Bill and to Sam to provide more detail on the quarter.

Revenues for the first quarter increased 3.5% to $10.6 billion.

Net income totaled $659 million or $1.74 per diluted share, and adjusted EBITDA was $2.005 billion.

While these results were modestly below our internal expectations, we remain optimistic about 2017.

And as you saw on our release, we are maintaining our previously issued earnings guidance for full year 2017.

During the first quarter, we achieved or exceeded our internal growth expectations for adjusted EBITDA over prior year for January and March.

However, it was largely offset by February's underperformance as planned.

Looking at volumes in the quarter, same facility admissions increased 1.2% and equivalent admissions increased 1.6%.

This represents the 12th consecutive quarter of equivalent admission growth for HCA.

As we noticed in our preview, the quarter's results were impacted by unfavorable changes in payer mix and the loss of 1 day when compared to the first quarter of 2016.

On the payer mix, our same facility Medicare admissions comprised a larger percentage of the company's overall admissions at 48.1% compared to 47% last year, while our same facility managed care and HIX admissions were 27.4% of admissions compared to 28.6% in the prior year's first quarter.

Clearly, there's been an unfavorable impact on our net revenue per adjusted admission in the quarter.

And I'll let Bill and Sam address all of this in more detail in just a moment.

Cash flows from operations were strong once again for this quarter, totaling approximately $1.3 billion compared to $1.4 billion last year.

The current quarter's cash flow was negatively impacted by a $188 million settlement payment in the quarter related to a long-standing contractual dispute in our Kansas City market.

Adjusting for this payment, cash flows from operations were up approximately 4.9% in the quarter compared to the prior year.

We continue to see nice improvement in our working capital, with our days in AR now at 48 compared to 50 days in the fourth quarter of last year and 52 days a year ago.

We continue to be quite active with our share repurchase program.

The company has repurchased 5.1 million shares in the first quarter at a cost of $424 million.

We have a little over $1.4 million -- $1.4 billion, I should say, remaining on our $2 billion authorization as of March 31, 2017, and we had 368.7 million shares outstanding at March 31, 2017.

We now have repurchased approximately 37.5% of the outstanding shares at the time of our IPO 6 years ago.

Let me spend a moment on our recent acquisition activity.

Yesterday, we announced the signing of definitive agreements to acquire 3 Houston area hospitals from Tenet and 2 Texas hospitals from Community Health Systems: 1 in Tomball, on the north side of Houston; and 1 in Jourdanton, which is about 40 miles south of San Antonio.

These facilities will strategically complement these markets and will enhance our ability to meet the medical needs and improve patient access through our provider network in both communities.

We expect these transactions to close sometime in the summer of 2017.

In addition, we closed on a 231 acute care hospital in Waycross, Georgia that also closed yesterday, which should complement our Jacksonville market.

Also, last week, we announced the signing of a letter of intent to purchase Memorial Health in Savannah, Georgia, a not-for-profit acute care hospital with 604 beds.

Memorial Health is the only provider in a market of Level 3 PICU and NICU services and Level 1 trauma services.

This should significantly strengthen our position along the Atlantic Coast from Jacksonville to Charleston.

We expect this acquisition to close by year end.

These 4 transactions are expected to add 7 hospitals with over 2,000 beds and approximately $1.5 billion in new annualized revenues to the company.

We look forward to bringing HCA's clinical capabilities and operational scale to these facilities.

And I guess, I would be remiss if I didn't say something this morning about all the national attention over the last 3 months to health care reform.

While I'm not about to predict where all the repeal, replace and repair discussions will ultimately land, I want to assure you that we are actively engaged in discussions with policymakers in Washington and in our states.

Most importantly, I'm confident that HCA's long-term focus on putting the patient at the center of everything we do will serve us well no matter where these discussions might settle.

And lastly, the HCA Board of Directors last week approved a change in the label name of HCA Holdings to HCA Healthcare.

The change will be effective May 8. Our new name is more reflective of our mission and the broad spectrum of care we provide to our communities and the dedication of our caregivers to our patients in our vast network of inpatient and outpatient facilities across our 42 U.S. markets and the U.K. HCA Healthcare will continue to trade under the symbol HCA.

So with that, let me turn the call over to Bill.

Great.

Thank you, Milton, and good morning, everyone.

I will give you some more detail on our performance and the results for the quarter.

As we reported in the first quarter, our same-facility admissions increased 1.2% over the prior year.

Same facility equivalent admissions increased 1.6%.

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

During the first quarter, same facility Medicare admissions and equivalent admissions increased 3.5% and 4.3%, respectively.

This includes both traditional and managed Medicare.

Managed Medicare admissions increased 7.3% on a same facility basis and represent 34.1% of our total Medicare admissions.

Same facility Medicaid admissions and equivalent admissions increased 0.9% and 1.3%, respectively, in the quarter.

Same facility self-pay and charity admissions increased 3.2% in the quarter, while equivalent admissions increased 3.5%.

This represents 7% of our total admissions compared to 6.9% last year.

Texas and Florida still represent about 70% of our total uninsured admissions.

Managed care, other and exchange admissions declined 3.2%, and equivalent admissions declined 1.9% on a same facility basis in the first quarter compared to the prior year.

Same facility emergency room visits increased 1.1% in the quarter compared to the prior year.

Same facility self-pay and charity ER visits represented 18.7% of our total ER visits in the first quarter of '17 compared to 18.6% in the prior year.

Intensity of service, or acuity, increased in the quarter with our same facility case mix increasing 3% compared to the prior year period.

Same facility surgeries were flat in the quarter with same facility inpatient surgeries increasing 0.9% and outpatient surgeries declining 0.5% from the prior year.

Same facility revenue per equivalent admission increased 1.7% in the quarter.

Our international division negatively impacted this stat in the quarter mostly due to currency conversion.

Same facility revenue per equivalent admission for our U.S. domestic operations increased 2.3% over the prior year.

Our same facility managed care and other in exchange of revenue per equivalent admission increased 4.4% in the quarter, in line with expectations.

Same facility charity care and uninsured discounts increased $510 million in the quarter compared to the prior year.

Our same facility charity care discounts totaled $1.086 billion in the quarter or an increase of $131 million from the prior year period, while same facility uninsured discounts totaled $3.475 billion or an increase of $379 million over the prior year period.

Overall, our uncompensated care trends are tracking in line with expectations and consistent with our uninsured growth trends.

Now turning to expenses.

Our same facility operating expense per equivalent admission increased 2.1% compared to last year's first quarter.

On a consolidated basis, salaries and benefits as a percentage of revenues was 46.1% compared to 45.8% than last year's first quarter.

Our salaries per equivalent admission increased 1.8% in the quarter on a same facility basis.

Same facility wage rates increased 2.3% in the quarter.

And overall, our labor trends remained stable.

Supply expense as a percent of revenue was 16.9% this quarter as compared to 16.7% and last year's first quarter on a consolidated basis.

Our same facility supply expense per equivalent admission increased 2.8% in the first quarter compared to the prior year period.

We did see a slight increase in medical device spend due to volume growth of some high-acuity procedures.

Other operating expenses increased 10 basis points from last year's first quarter to 18.2% of revenues.

Let me touch briefly on cash flow.

Cash flow from operations totaled $1.28 billion, down slightly from the $1.399 billion of last year's first quarter.

And as Milton mentioned, cash flow from operations was reduced by $188 million due to the Kansas City settlement that was paid in the first quarter.

Cash from operations was benefited by continued strong performance in accounts receivable, with our AR days decreasing to 48 compared to 50 at December of 2016.

Free cash flow, which is cash flow from operations, less capital and noncontrolling interest, was $564 million in the quarter compared to $779 million in Q1 of '16.

At the end of the quarter, we had $2.139 billion available under our revolving credit facilities.

And debt to adjusted EBITDA was 3.83x at March 31, '17, compared to 3.82x at the end of 2016.

Let me mention briefly about health care reform.

In the first quarter, we saw approximately 11,900 same facility exchange admissions as compared to the 12,500 we saw in the first quarter of last year or an approximately 5% decrease.

You may recall, we saw about 12,300 same facility exchange admissions in the fourth quarter of '16 for a 3.1% decline sequentially quarter-to-quarter.

We saw approximately 49,800 same facility exchange ER visits in the first quarter compared to the approximately 50,500 in the first quarter of '16 and 43,900 in the fourth quarter of 2016.

Overall, our exchange and reform activity is tracking with enrollment trends we see in our states, which is down about 5% from this time last year.

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 volume stats that I normally provide on these calls, and then I will give you an overview of our commercial volumes.

It is important to note that the prior year presented a difficult comparison in many areas.

For the quarter and for our domestic operations, on a same facilities basis, 9 of 14 divisions had growth in admissions, 11 divisions had growth in adjusted admissions, 10 divisions had emergency room visits growth.

Freestanding emergency room visits grew 16% and accounted for all of our overall ER growth.

Hospital-based emergency room visits were down 0.4%.

Normalized for the leap year effect, ER visit growth was approximately 2.2%.

Inpatient surgeries grew 0.8%.

Surgical admissions were 27% of total admissions in the quarter.

Inpatient surgical volumes were particularly strong again this quarter in cardiovascular, orthopedic and neurosurgery categories; 9 divisions had growth in inpatient surgeries.

Outpatient surgeries were slightly down by 0.6%.

Hospital-based outpatient surgical volumes declined 0.5%, and volumes declined by 0.7% in our freestanding emergency -- or freestanding ambulatory surgery division; 5 divisions in the quarter had growth in outpatient surgery volumes.

Behavioral health admissions grew 0.5%.

We had solid growth in approximately 85% of our 63 units, but we continue to struggle with a few of our larger units, and they are driving most of this slow growth.

We anticipate many of these programs will improve their performance over the course of the year.

Rehab admissions grew 6.2% in the quarter.

Deliveries were down 3.6% in the quarter, which drove a decline in neonatal admissions of 1.6%.

Cardiology procedure volumes continued to be strong and grew over 5%.

Trauma volumes grew 15% in the quarter.

Now let me transition to commercial volumes, which I'm defining as our managed care and HIX volumes.

For the quarter, we believe there are 2 primary reasons for the softness in this segment of our business.

First, we believe growth in overall commercial demand in our market has been slowing as compared to the strong growth we saw in 2014 through the first quarter of 2016.

The drivers of this issue, we believe, are as follows: one, the decline in HIX enrollment in our markets; two, the leap year effect; three, some notable general economy issues in a couple of our markets; and finally, softer tourism traffic in 2 of our large border markets.

We continue to believe demand for the commercial segment in HCA's markets will grow over the next few years in an expected range of 1% to 1.5% per year.

The second reason for the softness in commercial volumes, we believe, is the impact of competitive pressures.

The main drivers for this component are as follows: one, more supply across most patient care settings; two, fixed payer dynamics in certain Texas markets; and finally, a couple of competitors regained network status in certain payer contracts.

I want to add a few other observations, which I think are noteworthy.

First, and importantly, outside of a few HIX contracts, which I mentioned, we have not experienced any network changes with payer contracts.

That is, we have not lost any access to covered lives nor do we believe there are any specific HCA steerage issues in our markets.

And with respect to our contracting, we are 66% contracted for 2018 and 30% contracted for 2019 as pricing and network term is consistent with recent prior years.

The second observation I want to share is the broad-based softness in commercial volumes that we saw, in general, across our markets.

5 markets, however, accounted for almost 75% of our declines: South Florida, Houston, West Florida, Orlando and Las Vegas.

We did have a few markets that were up year-over-year.

And finally, commercial ER visits were basically flat when normalized for leap year.

Higher-duty business were up, but they were offset by declines in lower-duty business.

Obstetrics and general surgery volumes were down notably inside of our inpatient service lines.

While commercial volumes have been a challenge over the past few quarters, we believe our efforts to build out our local networks and create greater patient access, both from an outpatient facility standpoint and a digital media standpoint, are the right tactics.

This effort, coupled with our service line, care coordination and physician development initiatives, are necessary to compete effectively in this segment.

And finally, we believe our continued capital investments will create the necessary capacity and clinical capabilities in our facility to continue attracting commercial patients.

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

All right, Sam.

Thank you.

Amelia, if you come back on, and we'll take questions.

(Operator Instructions)

(Operator Instructions) And we will go first to Whit Mayo, Robert W. Baird.

Maybe just can we first talk about the Houston transactions and maybe how you see the pieces of the puzzle coming together in that market, maybe how the assets strengthen and complement one another, just kind of want to hear more about the playbook and opportunity that you see there?

Thank you, Whit.

Sam, you want that?

I do.

We have 10 hospitals in Houston, Texas today.

Our market share is roughly 18% or so.

But most of our hospitals are in a region of the community where it's in the southeast and in the northeast; it's not in the northwest.

Tenet hospitals in Tomball are more in the northwest quadrant of the Houston metropolitan area.

So this is a new market for us effectively in Houston.

It adds roughly 4% market share to our 18% and brings us up close to Memorial Health, which also has about 22% to 23% market.

So we see this particular segment of the community as growing faster than the rest of the community.

It gives us a new market.

As I mentioned, we have significant infrastructure in Houston already, given the size of our system, and we think that infrastructure can be leveraged to add values to these institutions.

And we look forward to getting more information on them as we develop our strategies for integrating them into the system.

Houston is in a bit of a general economic challenge right now, as most people know.

But we believe this segment of the city is growing, like I said, faster than the community as a whole.

But over the long run, we see Houston as a very important market to HCA and a market with a great deal of resiliency and will provide good prospects for us in the future.

And we'll take our next question from Mike Newshel from Evercore ISI.

Apologies if you already mentioned this.

But you gave us some details on the revenue run rate of the acquisitions.

Can you just tell us then what the EBITDA run rate is and what you think the potential is to ramp the margins closer to the company level?

All right, thank you.

Milton, you want to...

Sure.

Yes.

So looking at the 7 hospitals in total, and as I mentioned in my comments, it will -- annualized revenues will be about $1.5 billion.

And the price we paid was basically just like over $1.4 billion.

So we paid about our revenue multiple of around 0.9 to 0.95.

And so that implies the margin here is probably somewhere in the low- to mid-single digits in the aggregate on the group of 7. And we believe that over the next 2 to 3 years, we have opportunity to make significant improvements in the margins with, like I said, bringing both our scale and operational tactics and strategies to these new markets and new facilities.

We think we can improve the margins over the next 2 to 3 years to, hopefully, in the mid-teens.

And we'll take our next question from Kevin Fischbeck from Bank of America.

I wanted to dig into the commentary around the volume softness in the quarter.

I think last quarter, the tone that I was getting was that really, the softness was driven by some capacity constraints on your end.

It seems to me like the tone this quarter is more about general market softness in your markets.

And I just wanted to see, I guess, do you view this as kind of a blip?

And how do you think about kind of 2% to 3% kind of long-term volume growth over the next couple of years or in that target the next couple of years?

All right.

Kevin, thanks.

Sam, do you want to take a shot first?

We continue to believe that HCA markets in total are going to grow in that 2% to 2.5% from an adjusted admissions standpoint with respect to demand.

And so if we maintain market share, we should be in that particular zone for volume growth.

There are ups and downs from one quarter to the other, just like any other business would have for us, and this was a difficult quarter from a comparison standpoint because we lost a day.

And losing a day clearly means we lose outpatient activity.

We lose certain inpatient activities as well.

So it presents some comparison challenges.

But when we pull up from that and look at what we'll call the normalized effect, we felt it was a reasonable volume quarter.

It's not necessarily as strong in some areas as we would have hoped, and we need to make some adjustments, and we are making adjustments where we can to address that.

As far as capacity constraints go, that probably affected some of our facilities, but we're not pulling all the way up to the company level.

I don't think, on a composite level, it necessarily affected our volume performance in the quarter.

There are, like I said, certain institutions that really have to manage their utilization and capacity very effectively to create growth prospects for them in the short run.

We're addressing that in the long run with a number of our capital projects.

So that can periodically present some individual facility challenges, but I don't see that as driving all the way to the company and explaining the company's measures.

Our growth strategies, I think, are very comprehensive.

They are resourced very timely and, I think, sufficiently, and our execution has been good.

But we do compete against some very formidable systems, and we have to continually look for ways to up our game, detail our business better and provide some advantage for the company.

And we're doing that in a lot of areas, and I think we'll continue to find ways to improve upon that.

So we remain very optimistic with our overall volume picture with a few challenges here and there in the short run.

Milton, did you want to add something?

Yes.

Let me just add one other thought to that.

As Sam commented, too, I think when you look at the rest of the year, our volume comps get somewhat easier.

As Sam mentioned, based on the market share information we have and looking at market demand, we had strong market demands starting in 2014, really, through the first quarter of 2016.

The demand's rate of growth slowed starting in the second quarter of '16.

So I think as we think about our growth for the rest of the year relative to volume, we will be comping to periods where the volume growth was lower than the first quarter of 2016.

So I think, too, you've got to take that in consideration as we think about the outlook for the rest of the year.

And we'll go next to Joshua Raskin from Barclays.

Appreciate the color you guys gave, Sam, on the commercial volume changes.

The 2 things I didn't hear were flu.

I'm curious if that has an impact on your payer mix.

And then, secondarily, a movement to outpatient.

Do you tend to be more commercial patients moving to outpatient as opposed to seniors?

I'm just curious if those 2 factors are having any impact.

All right.

Our flu volume was up in 2017 as compared to 2016, and most of that was concentrated, I'll say, in the Medicare book.

So that did produce some growth in Medicare.

I don't think it affected our commercial book in any significant way.

The movement from inpatient to outpatient typically is in surgical areas more than it is anywhere else.

And our surgery growth on the inpatient was up 0.9%, and we were down a little bit on the outpatient.

I think most of the outpatient decline is centered around 2 things: one, the calendar being a little bit of that; and then secondly, it's a fairly competitive field, when you get into outpatient surgeries with other centers, other hospitals, other physicians in their own clinics and so forth.

So again, we are adding capabilities in our outpatient surgery platform, and we're working with our physicians to find ways to leverage that further.

But I don't think there was much transition in this cycle from inpatient to outpatient creating any kind of unique pressure.

And we'll go next to Ralph Giacobbe from Citi.

Is there any way to roughly split out or how you see the payer mix pressures between sort of exchange-related issues versus core commercial?

And then you mentioned economic issues in your markets as well as -- or in some markets as well as HIX payer dynamics.

Just hoping if you could flesh that out for us.

All right.

Sam or Bill?

Go ahead on the commercial piece.

HIX was down what...

Yes.

So our HIX volume was down 5%.

And as -- I'm sorry, as Sam mentioned, we did have a couple of dynamics in our Texas markets.

But overall, our HIX volume is kind of tracking with what we see in enrollment in our states with some pluses and minuses going on.

So we'll see how that tracks for the remainder of the year.

The payer dynamics in Texas that I was alluding to are centered around the fact that we didn't know exactly where the lives in a couple of markets were going to land.

And so it took us until the first quarter to see that.

We -- and so at Houston, San Antonio and Austin, we did see some pressure on our HIX volumes as a result of the lives landing in certain payers' laps, if you will, that weren't contracted for us because we did not think the rates were sufficient.

So we had those dynamics affecting us in those 3 markets.

That was really isolated mostly to those markets.

We do have access to HIX lives, but the payer relationships that we have in those markets did not gain some of the business that we anticipated, and so that created a little bit of pressure for us.

And can I just add on to that?

As you know, for the past couple of years in health reform, the first quarter has been where we've seen significant growth at HIX volume.

That didn't happen this year.

If you look at first quarter of '16, we had HIX volumes growth of 27% that just wasn't present in this quarter due to the enrollment activity as well.

Yes.

And this is Milton.

I'll just add, Ralph, to deconstruct the payer mix shift between the commercial and HIX is complicated further by here in 2017 that there's a lot of movement in lives between HIX and commercial.

And so it makes really understanding that deconstructing a little more complicated too in order to understand.

But I think we've given you our best view of it.

And we'll go next to Gary Lieberman from Wells Fargo.

Maybe just a follow-up there.

A few of the markets that you mentioned is seeing disproportionate weakness, Orlando, South Florida and Vegas.

Anything specific in those markets that you could call out for us?

Yes.

In Las Vegas, that's the market that I was referring to where we had both UHS and Dignity get back into 2 payer contracts that, in the past few years, they weren't in.

And that's resulted in some commercial market share pressures in that particular market.

In Orlando, we've seen our competitor systems make some significant investments in a couple of areas that has impacted our business there.

Both South Florida and West Florida were particularly impacted by softer tourism, number one, and a little bit softer emergency room volume than we had seen in the past.

Those were the primary drivers in those markets.

(Operator Instructions) And we'll take our next question from A.J. Rice from UBS.

On the -- obviously, you have the Texas deal, but you also has the 2 you mentioned now in Georgia as well.

Would you say that you're seeing a pickup in activity level out there?

Has your posture toward transactions that have been there before maybe becoming more committed to do an acquisition?

And can you give us a sense of what -- how this affects your ongoing buyback activity?

Yes.

All right.

That's one for Milton.

Yes.

A.J., so I think I mentioned over the last one or the last call we've talked about the pipeline being a little bit more active.

And not just with a number of maybe opportunities, but the possibility that some of these opportunities could actually come to closure.

And I think, over the last couple of days and last week, we certainly have been able to deliver that.

So the pipeline remains active.

So we will see if we can continue to achieve some opportunities for growth through acquisitions.

So from that front, yes, it is more active than, say, over the past couple of years.

Relative to how it affects our buyback, the transactions, the roughly $1.4 billion that these transactions would come in terms of purchase price is not going to affect our share buyback approach.

We intend to continue to buy back our stock throughout the rest of this year with the authorization that we have.

That was our intention when we made -- when the authorization was approved by the board back in the -- in 2016.

So we're continuing that plan undisturbed by these acquisitions.

And we've been clear to indicate, too, I think, over the past couple of years with our strengthening balance sheet, free cash flow that we have the ability to both be an active buyer of hospitals that make sense for us and also an active buyer of our stock.

And so we intend to continue to do both.

And we'll take our next question from Brian Tanquilut from Jefferies.

Bill, just had a question on salaries and benefits.

That's obviously up year-over-year sequentially.

Is there anything you would call out, any trends?

And also, just an update on nurse hiring and nurse wages.

All right.

I'll start with the trends and let Sam talk about nurse.

Our characterized labor environment, really, for the past several quarters is pretty stable.

When we look at labor combined with productivity, wage rates, it's been very stable for us.

The labor costs per adjusted admission at a little north of 2% is a pretty good number for HCA.

And again, I think it's pretty stable.

Contract labor has stabilized on us.

We've got a lot of initiatives in the HR around nurse retention and recruitment, and I think those continue to provide benefit for the company.

Yes, this is Sam.

The only thing I would add to that is our RN turnover, our nursing turnover, has actually improved 110 basis points from where it was last year at this particular point in time.

So we are seeing some improvement from some of the initiatives that we have implemented.

Our nursing contract labor was only up 5.7% in the quarter on a year-over-year basis.

We have some other areas where we're investing in contract labor.

That's why you see roughly 10% in our year-over-year growth.

But that's due to some outsourced departments in certain ancillary areas.

So we believe that the -- our nursing initiatives, our HR initiatives and so forth are poised to continue to support this effort and deliver some value to the company in this area.

And we'll go next to Chris Rigg from Deutsche Bank.

I know you've talked a lot about the commercial volumes and the details behind it, what happened in the first quarter.

But I guess I'm still trying to get a better sense for what is assumed in guidance for the rest of the year in terms of -- Sam, you highlighted a bunch of factors here, what you think will actually get better as you move through the year and what will serve as a pressure point throughout 2017.

All right.

Bill or Sam?

Let me kind of give you the broad brush on guidance first, and then let Sam and Milton add in.

So obviously, as you know, we've reaffirmed our guidance going through the balance of the year.

We got variables that I think give us comfort in that.

We believe the low end of our guidance for the balance of the year basically implies a 3% growth in the last 3 quarters to the high end at 7%, midpoint's just around 5%.

So as we look at the balance of the year, as Sam mentioned, we look at our volume portfolio, comps get better in the second half of the year.

We still believe that 2% to 3% volume guidance is achievable for the company, coupled with our 2% to 3% pricing going forward.

Our teams continue to costs -- manage our costs pretty well.

And looking specifically in the commercial book, as Milton mentioned earlier, you saw those commercial trends start to decline in the last half of the year.

So the first quarter still gave us a pretty good comp as our commercial grew just under 3% in the first quarter of '16.

So we think, as we go through the year, that gives us confidence that we can stand behind our guidance at this point.

And we'll go next to Scott Fidel from Crédit Suisse.

Just interested in an update on where you expect leverage will end the year, just in the context of the acquisitions that you're doing.

And then just had a separate follow-up question just around supply costs, and if you could give us an update there.

Looks like they had picked up a bit over the last couple of quarters.

So just wondering if that's on the drug side or anything else that's going on there.

All right, Scott.

I think, Bill...

I'll take that one.

On the leverage, as we stated, were 3.83 basically right now.

Clearly, we got the balance sheet capacity going forward.

It'll go up slightly, maybe 10 basis points, by the end of the year if we get all of these transitions completed.

But again, as Milton said, we are optimistic in the earnings performance, that, that will continue to go back to kind of current levels well within our range of 3.5 to 4.5 right now.

So again, I think the balance sheet remains pretty strong.

On the supply cost side, you're right, I did mention it was mainly due to some increase in device costs mainly for some high-acuity volume.

Overall, we're very pleased with our supply cost trends.

If you look over a longer-term trend, we've been able to manage our supply cost on a per adjusted admission basis at that 1.5% to 2%.

Obviously, continued strong performance by our GPO, HealthTrust Purchasing Group, a lot of initiatives in the supply chain operations as well as our partnering with our clinical teams and certain clinical initiatives.

So the device cost that we saw this order was really entirely due to volume growth in some of these high-acuity procedures, such as TAVR cases.

We've seen our TAVR cases increase approximately 70% versus last year.

This is a high-supply cost area with the cost of new valves.

We've also seen an increase in certain neurological cases, which include some implantable stimulator devices.

So overall, given the volume growth, the supply cost trends are -- don't surprise us, and we're pretty confident with our supply chain processes today.

And we'll take our next question from Sheryl Skolnick from Mizuho.

Two somewhat unrelated, forgive me, but the first one is just a detail.

On the ER visits, Sam, I think you said that they were down in the hospital-based ERs, but -- and all of the growth was recorded in the freestandings.

How did that dynamic develop?

In other words, what's causing that, do you think?

Well, I think there are a lot of alternative supply for patients to consider on the lower-acuity side.

Most of our declines were in lower-acuity levels in our facilities.

So that's what we saw.

I mean, our higher acuity business, the top 3 categories were up.

The lower acuity, the bottom 3 were down.

And the net of that was slightly down in our facilities.

I think the leap year effect is part of that as well.

So we were actually up if you normalize for leap year.

But nonetheless, it was much slower growth in the hospital.

Now we've added units in the freestanding emergency room, and they're embedded in our facilities, and so that's part of the growth that we've seen here in the freestanding side as well.

But even on the same-store, freestanding basis were up more than we were up in the hospital side.

The other thing I would say is we're using our freestanding emergency room strategy for 2 things: one, for outreach; and then, secondly, for a quicker capacity relief where we need it.

We continue to operate our hospital-based units in almost 90% of our targeted utilization per bed.

And so the freestanding emergency room tactic and deployment is a quicker way to market for capacity, plus it puts us, in some instances, in a different geography that complements our core hospital.

So that would be part of the discussion as well.

And we'll go next to Ana Gupte from Leerink Partners.

On the Medicare waiver funding where the administration is not only for the LIP program in Florida but more broadly, can you give us a sense or any color on the impact of that or the economics to you this year and in '18?

Ana, I'll go ahead and take this.

We still don't have a lot of clarity around the waiver process.

We do anticipate there will be increasing waiver requests coming from the states.

We have seen the Florida requests come in.

That one is still sort of pending.

The CMS and the State of Florida are negotiating the terms and conditions of that LIP increase that's been proposed.

So we have no idea at this point exactly how much would ultimately come to Florida and then if any of that would find its way to us.

And again, other states will just sort of watch and see how the year plays out.

But we haven't built anything into our expectations for material changes in any waivers for the balance of the year.

And we'll take our final question from Gary Taylor from JPMorgan.

One clarification, one question.

Just clarifying, and I apologize if I missed you saying this.

But the Oklahoma children's divestiture and then all the several acquisitions you announced yesterday, none of that is in the guidance that you've affirmed at this point, correct?

That is correct, Gary.

Okay.

And then just my question, just trying to look through the shift in payer mix, the about 100 basis points, year-over-year shift on the inpatient side to Medicare.

Looking back last year, you had a similar 100-basis-point shift in 2Q and 3Q and generated EBITDA growth through that.

So just trying to think about what's unique about this shift in the first quarter outside of just the leap year comp, if there's anything else to add to that.

I'm not sure I can give you a specific explanation.

There's a lot of pieces and parts to a quarter, as you well know.

And so the puts and takes are difficult to just sit here and synthesize down to 1 or 2 points.

But I mean, there may be something unique...

Yes, I think, Sam, if I look back, I think what I would call out properly, our surgical volume was higher overall.

I think back in those periods, it resulted in higher revenue per equipment admission.

So for example, we'd reported this first quarter 1.7% growth, you go back and look at the second and third quarter, which are the periods I think you were talking about, Gary, and our NRAA growth was 2.1% in the second quarter 2.7%, so 100 basis points higher in the third quarter.

So certainly, that is the reason for a better performance, and hence, it's not just the payer mix, I mean, but the underlying service mix as well.

All right.

Thank you very much.

And, operator, we thank you very much as well, and we will talk to you all soon.

Have a great day.

Ladies and gentlemen, that does conclude our conference for today.

Thank you so much for your participation.

You may now disconnect.