美國醫院公司 (HCA) 2017 Q3 法說會逐字稿

Welcome to the HCA Third Quarter 2017 Earnings Conference Call.

Today's call is being recorded.

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

Please go ahead, sir.

All right, Don.

Thank you, and 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 listening to the webcast.

Here this morning with us is our Chairman and CEO, Milton Johnson; Sam Hazen, President and Chief Operating Officer; and Bill Rutherford, our Chief Financial Officer and Executive VP.

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 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 Healthcare, Inc., excluding losses and 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 Healthcare, Inc.

to adjusted EBITDA is included in the company's third quarter earnings release.

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

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

All right.

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

Before we go into details about the quarter, let me take a few moments to say a few words about the unprecedented sequence of events that began with Hurricane Harvey, which hit Corpus Christi and Houston, followed by Hurricane Irma in Florida and then the tragic shooting in Las Vegas.

As you know, we have significant presence in all these markets.

In Texas, Hurricane Harvey first made landfall near our Corpus Christi market, where we have a hospital with 3 campuses and 2 freestanding emergency rooms.

From there, it moved to Houston, where it dumped record amounts of rain, causing significant flooding for days.

In the Houston market, we have 15 hospital campuses, 6 freestanding emergency rooms, 5 surgery centers and 1 freestanding cancer center.

All of these facilities were affected either directly or indirectly.

Certain hospitals were evacuated and several received evacuated patients from our hospitals, and in some cases, from non-HCA hospitals.

Several of our hospitals in Dallas, Austin and San Antonio also took evacuated patients.

Not only were our facilities affected by Harvey, but we have approximately 14,000 employees in Houston and Corpus Christi, many of whom are still recovering from significant personal loss.

Just days after Harvey, Hurricane Irma struck South Florida, sending a path of destruction from South to North, across virtually the entire state.

Florida, of course, is one of our biggest states, with 50 hospital campuses, 32 surgery centers, 17 freestanding emergency rooms, 10 diagnostic imaging centers and more than 63,000 employees.

Once again, we evacuated certain facilities and felt the impact of Irma throughout all of Florida, and to a lesser extent, even into Georgia and South Carolina.

Then as we were recovering from these natural disasters came the horrific shooting in Las Vegas.

As the closest trauma center to the concert site, HCA Sunrise Hospital & Medical Center received approximately 200 victims in one hour.

For the entirety of the event, 120 patients with gunshot wounds received care.

All 30 operating rooms were immediately activated and operated throughout the night and the following day.

In all, more than 80 operations were performed.

As a Level II Trauma Center, Sunrise dealt with many of the most severely injured patients.

Meanwhile, our Southern Hills and MountainView Hospitals took those less critical and made sure Sunrise had all the necessary staff, supplies and equipment to manage the situation.

While we have a very robust disaster preparedness and mass casualty plans in place, nothing could have completely prepared us for this unprecedented sequence of events.

I know I speak for entire management team in saying there's never been a time when we were more proud of the incredible teamwork and professionalism displayed throughout the organization.

Our colleagues at every level of the company, but especially in those communities, performed beyond any expectations we could have and demonstrated the absolute best of the HCA culture.

Now let me spend a few moments on my thoughts around the third quarter.

The hurricanes, along with the Texas Medicaid Waiver reduction in the quarter, add complexity to the evaluation of the third quarter results.

However, if you look at the broad trends and normalize for the disruption in the hurricane-affected markets, we believe many of the trends are comparable to the first half of 2017.

Sam and Bill will provide detail on some of these trends in a moment.

Third quarter revenues increased 4.2% to $10.7 billion in the third quarter compared to the prior year.

Hospitals acquired during 2017 contributed approximately $155 million to the increase in revenues in the quarter.

Adjusted EBITDA totaled $1.776 billion, down $181 million from the prior year.

As mentioned in our earnings release, we estimate the hurricanes unfavorably impacted our third quarter performance by approximately $140 million, or $0.24 per diluted share, and increased expenses and losses of revenue in our Corpus Christi, Houston, Florida, Georgia and South Carolina markets.

Also, results for the third quarter were negatively impacted by $50 million, or $0.08 per diluted share, associated with Texas Medicaid Waiver Program settlement amounts.

As mentioned earlier, volumes remained somewhat consistent with the first half of 2017, with same facility admissions increasing 60 basis points and equivalent admissions increasing 30 basis points from the prior year.

We estimate that the hurricanes had an unfavorable impact of 30 basis points on same facility admissions growth and 80 basis points on same facility equivalent admissions growth.

This represents the 14th consecutive quarter of equivalent admission growth for the company.

On payer mix, our same facility Medicare admissions comprised 45.5% of the company's overall admissions, while our same facility managed care and exchange admissions were 27.2% of total admissions compared to 44.7% and 27.8%, respectively, in the prior year's third quarter.

As we noted in our October 18 third quarter preview, we have updated our guidance for 2017.

We currently estimate adjusted EBITDA will range between $8 billion and $8.15 billion for 2017.

This does include the estimated impact of hurricanes and the Texas Medicaid Waiver Program settlement amounts.

Earnings per diluted share is now estimated to range from $6.45 to $6.70 per diluted share.

Cash flows from operations totaled $1.008 billion compared to $1.206 billion in the third quarter of '16.

The decline is primarily attributable to the $215 million decline in net income.

Our days in AR increased slightly to 51 compared to 50 days at year-end and 49 days at the end of the second quarter.

We remained active with share repurchase in the quarter.

We repurchased 6.3 million shares of our common stock at a cost of $509 million.

And for the 9 months ended September 30, 2017, we have repurchased 17.8 million shares at a cost of $1.475 billion.

As you may have seen this morning, the company announced that the board has approved a new $2 billion share repurchase authorization.

And at October 31, 2017, including this newly announced program and the remaining authorization under the company's November 2016 program, the company has approximately $2.150 billion authorized for share repurchase.

Finally, an update on M&A activity.

During the third quarter, we closed the acquisition of 5 hospitals in Texas for approximately $880 million.

Also, on October 1, 2017, we closed on the previously announced Weatherford, Texas acquisition.

That brings total M&A activity for the year to 7 hospitals, with 2 more pending, which we believe should close sometime in the fourth quarter.

The previously announced divestiture of OU Medical Center is now estimated to close on December 31 of this year.

And so with that, I'll turn the call over to Bill.

Great.

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 0.6% over the prior year, and equivalent admissions increased 0.3%.

Year-to-date, same facility equivalent admissions were up 1.2% over the prior year.

As Milton noted, we estimate the hurricanes negatively impacted same facility admissions growth by 30 basis points and equivalent admission growth by 80 basis points.

In addition, the loss of a business day compared to the third quarter '16 also impacted some volume statistics.

Sam will provide more commentary in a moment, and I'll give you trends by payer class.

During the third quarter, same facility Medicare admissions and equivalent admissions increased 2.4% and 3%, respectively, compared to the prior year period.

This includes both traditional and managed Medicare admissions.

Managed Medicare admissions increased 4.9% on a same-facility basis compared to the prior year period and represent 34.1% of our total Medicare admissions.

On a year-to-date basis, Medicare equivalent admissions were up 3.4%.

Same facility Medicaid admissions and equivalent admissions declined 1.8% and 2.2%, respectively, in the quarter compared to the prior year period.

Same facility self-pay and charity admissions increased 6.4% in the quarter.

These represent 8.4% of our total admissions compared to 8% in the third quarter of last year.

Year-to-date, our same facility uninsured admissions were up 5.7% from same period last year.

Managed care and other, including exchange admissions, declined 1.7%, and equivalent admissions declined 1.9% on a same-facility basis in the third quarter compared to the prior year.

Same facility emergency room visits increased 0.3% in the quarter compared to the prior year.

And as we stated in the release, we estimate that hurricanes had a 30 basis point impact on emergency room growth in the quarter.

Same facility self-pay and charity ER visits represented 20.3% of our total ER visits in the quarter compared to 19.9% last year.

And on a year-to-date basis, same facility emergency room visits have increased 0.7%.

Intensity of service or acuity increased in the quarter, with our same facility case mix increasing 3.3% compared to the prior year period.

Same facility inpatient surgeries declined 0.7%, and outpatient surgeries declined 4.2% from the prior year, reflecting the impact from hurricanes in our South Texas, Florida, Georgia and South Carolina facilities.

When adjusted for the hurricane impact and one less business day, we estimate outpatient surgeries declined approximately 0.7% in the quarter.

During the third quarter, same facility revenue per equivalent admission increased 2% from the prior year.

Our hospital same facility managed care, other and exchange revenue per equivalent admission increased 3.1% in the quarter and 4.6% on a year-to-date basis compared to the prior year.

The growth rate in the third quarter is impacted by the comparison to a strong 6.5% growth recorded in Q3 of 2016 and some hurricane impact due to the lower surgery volume.

Same facility charity care and uninsured discounts increased $369 million in the quarter compared to the prior year.

Same facility charity care totaled $1.19 billion in the quarter, an increase of $155 million from the prior year period, while same facility uninsured discounts totaled $3.447 billion, an increase of $214 million over the prior year.

Our uncompensated levels have trended in line with our uninsured and revenue trends.

Now we turn to expenses.

There is a lot of noise in the quarter from hurricanes that affected our expenses, making it more difficult to compare expense trends on a quarterly basis.

Same facility operating expense per equivalent admission increased 4.5% compared to last year's third quarter.

Our consolidated adjusted EBITDA margin was 16.6% for the quarter as compared to 19.1% in the third quarter of last year.

Same facility salaries per equivalent admission increased 4.9% compared to last year's third quarter.

Salaries and benefits as a percent of revenue increased 140 basis points compared to the third quarter of '16, primarily reflecting hurricane-related costs.

We are pleased that we've seen a reduction in our nursing turnover from 20.2% last year to 18.3% this year.

This has led to a sequential improvement in contract labor on a same-facility basis, and total contract labor has grown 2.2% over prior year in the quarter.

Same facility supply expense per equivalent admission increased 2.2% for the third quarter in the prior year period, and supply cost as a percent of revenue increased 10 basis points.

We continue to see sequential improvement in supply expense as a percentage of revenue during 2017.

Other operating expenses as a percent of revenue increased 90 basis points from last year's third quarter to 19.4% of revenues, primarily reflecting increases in year-over-year contract services and professional fees that we discussed on our last 2 calls.

This metric was also impacted by hurricane-related costs.

Let me touch briefly on cash flow.

Cash flows from operations totaled $1.008 billion.

Year-to-date, cash flows from operations were $3.692 billion.

And free cash flow, which is cash flow from operations less capital expenditures and distributions to noncontrolling interest, was $1.296 billion.

At the end of the quarter, we had approximately $2.037 billion available under our revolving credit facilities.

Debt-to-adjusted EBITDA was 4.08x at December 30, 2017, compared to 3.82x at December 31, 2016.

Let me speak briefly on our health reform activity.

In the third quarter, we saw approximately 12,200 same facility exchange admissions as compared to the approximate 12,900 we saw in the third quarter of last year, for a decline of 5.8% year-over-year and 4.9% decline sequentially from the second quarter.

We saw about 46,700 same facility exchange ER visits in the third quarter compared to the 49,300 in the third quarter of '16 and 52,400 in the second quarter of '17 for a 10.9% decline sequentially.

These health reform results are pretty consistent with what we've been seeing all year, and generally speaking, track with the enrollment activity we see in our markets.

So that concludes my remarks.

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

All right.

Thank you, Bill, and good morning to everyone.

I'm going to provide some additional detail on our volume trends for the quarter as compared to the third quarter of last year.

On a same-facilities basis, for our domestic operations, 8 of 14 divisions had growth in admissions.

Growth was especially strong in our North Florida, Tennessee, Capital and South Atlantic divisions.

And conversely, our East Florida, Far West, Mid-America, Central West Texas and Gulf Coast divisions were weak.

East Florida and Gulf Coast were obviously impacted some by the storms, but we believe both markets have recovered well, with no indications of permanent issues.

All other divisions were slightly up or slightly down for the quarter.

8 of 14 divisions had growth in adjusted admissions.

8 of 14 divisions had growth in emergency room visits.

Freestanding emergency room visits grew 18%, while hospital-based emergency room visits declined 1.5%.

Once again, most of this decline was seen in lower acuity visits.

Admissions through the emergency room grew by 1.6%.

Trauma and EMS volumes grew by 7% and 1%, respectively.

Inpatient surgeries were essentially flat.

Surgical admissions were 28% of total admissions in the quarter.

Surgical volumes were strong in cardiovascular and orthopedic service lines.

7 of 14 divisions had growth in inpatient surgeries.

Outpatient surgeries were down 4%, and volumes were down in both our hospital-based and freestanding ambulatory surgery centers.

We had one less business day in the quarter as compared to last year, and the storms had an effect.

Behavioral health admissions grew 4.1%.

Rehab admissions grew 4%.

Cardiology volumes grew 5%.

Births were down 2.5%, and neonatal admissions were essentially flat.

In summary, after adjusting for the estimated impacts of the hurricanes, our volume trends were generally consistent with the first half of the year.

As I stated in my comments last quarter, we believe the growth in inpatient demand, in general, has moderated across most of our markets over the last year, which we believe explains most of our softer volumes.

For the 12 months ended March 2017, which is the most current data available, inpatient market share for HCA increased by 10 basis points as compared to the previous period.

Now let me transition to our operations in London.

Adjusted EBITDA in the quarter for this market was down 12%, and both local currency and dollars were approximately $6 million.

This decline is less than the last quarter and represents a better overall performance for this division.

We anticipate continued improvements in our results over the next few quarters.

Overall, we continue to refine and enhance our efforts to improve and grow our business.

We believe these refinements and enhancements will deliver value for our patients and physicians, allow us to compete more effectively in a dynamic marketplace and ultimately sustain growth for the company.

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

All right.

Thank you.

Don, if you would come back on and let's poll for questions.

(Operator Instructions) Don?

Don, are you with us?

(Operator Instructions) And we'll take our first question from Justin Lake with Wolfe Research.

So Sam, on the call, you mentioned that you think inpatient demand is down across your markets.

I wanted to get the company's broader view of how we should think about the typical algorithm to what, I think, you described as 4% to 6% EBITDA growth in terms of market growth plus market share growth, et cetera, plus leveraging some fixed costs to get to that 4% to 6%.

If market growth stays where it is today, what do you think's a reasonable EBITDA growth rate for the company would be in the near to intermediate term?

Let me start on the demand point of your question, Justin, and I'll let Bill jump in here on some of the other components.

Inpatient demand for HCA's markets are still growing.

In the first quarter of 2017, which is the most recent data available, our markets -- 42 markets grew by 0.8%.

That's a little bit below our expected level of growth, as we think about the overall factors that drive demand for health care services in our markets.

If you normalize that a little bit for leap year, it probably grew about 1%.

2016 grew at about 1.4% to 1.5% for inpatient demand.

And we use that as a general proxy for overall demand, with some aspects of outpatient growing faster than that.

So we still are confident that the prospects for growth in HCA's markets is still good.

We have indicated in the past, and we continued to believe that, over the long run, inpatient demand in health care services in HCA's markets is going to grow somewhere around 2%.

It could be a little bit more, a little bit south of that depending on a number of factors.

Our belief around population growth, utilization increases for aging baby boomers, chronic conditions and the growth in diabetes, in cancer and other -- obesity, those kind of things are driving demand.

And then when you look at the market economies, we still believe there's going to be solid job growth across HCA's markets.

So the company is investing in inside of this belief around demand.

We're relieving capacity constraints.

We're adding outpatient facilities to our network, and we're putting ourselves in a position to really compete at a high level.

And so our approach is built around volume growth.

We have to have volume growth, I think, to be successful.

We've had modest volume growth this year in a difficult period, with modest market share gains.

For us to get to our volume objectives, we have to pick up 20 to 25 basis points of market share, not 10.

So we're a little bit shy of where we want to be.

Again, some of that is market specific, some of it is competitor-specific.

But over the long haul, we think we are in a position to achieve that objective.

And that is obviously a starting point for our ability to achieve our EBITDA targets that we've laid out.

And I'll let Bill or Milton carry forward on the follow-through on that question.

Yes, Sam.

I think I'm just -- I'm not sure if I have a lot to add to that, but just to echo Sam, we still believe in our 4% to 6% long-term EBITDA expectations for the organization.

As Sam mentioned, we believe that because of our attractive markets, the population growth, the aging of the population we're seeing in our markets, good economic conditions in our markets.

We've got, as you know, roughly 25% market share on a composite basis in these markets.

We're making substantial capital investments in the markets, including now adding some acquisitions of, as I mentioned, 7 new hospitals this year.

Although not contributing to earnings growth in 2017, we expect those acquisitions to contribute to growth in the out years.

Our team's execution, their track record of execution, all those things combined gives us confidence in our guidance for long-term EBITDA growth of 4% to 6%.

Obviously, this year has been a challenging year where we're not going to meet that expectation.

But if you look back over recent years, we've had years in the last 5 years where we've exceeded that expectation, with a 5-year CAGR of just under 6%.

So again, all that goes into our thinking about the long-term growth expectations for HCA.

We'll take our next question from Kevin Fischbeck with Bank of America.

Maybe just want to follow up on that question.

When we think about why the volume number this year is likely to be less than your long-term target, what is it about 2017, obviously, with leap year and hurricanes.

But even if you exclude those things, you're still coming in below what you would expect to do long term on volume.

So what is it about the backdrop today that makes it a challenging backdrop?

And why would it get better next year?

There doesn't seem to be a lot of obvious areas of market improvement heading into next year versus this year.

I don't know -- this is Sam again.

I don't know that I have every answer to 2017.

I mean, some of this is judgments about what we see in the market.

And if you look back over the last 3 or 4 years, it was never the same metric in each of those 3 or 4 years.

So one year may grow 3%, one year may grow 1.8%.

And so if you're looking at over a bit of a longer run, you get to an average that seems to be a reasonable proxy for going forward forecasts around volume growth in our markets.

I mean, there has been some level of competition, as we've indicated in the past, in certain outpatient arenas that can have some downstream implications for us.

But that has moderated, as I've said on the last call, and we've seen some saturation, if you will, of development in certain outpatient elements that have slowed that issue down.

So I think when you look at where we are trending, when you normalize for some of these factors, this is just one of those years, I believe, where the market's been a bit overheated in the past and maybe it just moderated.

But from my standpoint and from the studies that were done, we see no reason that it won't move to the norm over some reasonable period of time.

We don't have all of our 2018's budgets finalized yet, so we're not in a position to really provide guidance on that particular year.

But if you think about it in the context of the next 2 to 3 years, we think growth over that cycle is going to be somewhere consistent with this 2% number.

We'll go next to Frank Morgan with RBC Capital Market.

I appreciate the color on the third quarter volumes relative to the first half of the year.

But I'm curious, could you give us any just general commentary about what you're seeing so far in the fourth quarter related to any kind of volume recovery, the normal seasonal volume recovery you would see?

And then is there any difference in the recovery that you're seeing between hurricane-affected and non-hurricane-affected markets?

Sam?

Well, I can't really give a company view on the volumes coming out of the gate in the fourth quarter.

But I will say this.

Houston and Miami, which I've said in my comments, the indications coming out of the gate in the fourth quarter, given the significance of events in those 2 markets, does not suggest any permanent issues that would be a result of the hurricanes.

So in Houston, we're actually tracking slightly above last year.

And in Miami market we're slightly below, but we understand why that is.

And it's not related to any kind of permanent market damage in either of those 2 markets.

Right.

Thank you.

And as you know, our practice is we don't talk about the current quarter, but obviously, we're providing a little color around those hurricane markets so you understand where they stand.

All right.

Next question.

We'll go next to Ralph Giacobbe with Citi.

Circling back to first couple of questions, I guess.

Despite the pressures that you've seen, you've been still able to put up about 3% same facility revenue growth.

Obviously, this quarter was impacted by the hurricanes.

But even if we add that back, you haven't been able to leverage EBITDA.

So are there things you can do on the cost side that would make you think you could hold the line on margins if 3% top line trend sort of sustained into next year?

Or do you really think you need that 4% level plus to hold margin?

Bill, do you want to take that?

Yes, Ralph, this is Bill.

I think we've historically said that at that 4% level, that's where we're aiming for mainly margin maintenance.

Clearly, this quarter, the margin was impacted by the softening revenue due to the hurricanes, the waiver program as well as some cost trends due to the hurricanes.

And then -- and I will mention that acquisitions that we came in didn't have a margin contribution with them, so all those come into play.

But I think if you step back broadly, we're right on the lower end of our guidance.

We still anticipate margin maintenance.

I think we've got a track record of continuing to manage the cost structure.

We've got a lot of initiatives underway, whether it be our supply cost initiative, continued opportunities.

I mentioned the labor agenda as we've had some success in various initiatives to reduce nursing turnover.

So I still believe at that 4% level, we still anticipate a margin maintenance level.

We'll take our next question from Sheryl Skolnick with Mizuho.

First, let it be said, very fitting tribute to the hard work that was done and the commitment and compassion of all the people who cared for everyone else during this quarter in very difficult times.

Pays to remember that you're in the hospital business, and you can't forget that.

But with that, we still need to understand, and I think that all the questions around 2018 probably aren't going to help us.

So maybe I'd step back and sort of ask a different question about the company's forward-looking strategy.

For the first time in a long time, you're doing acquisitions.

You're still committed to a grow market share, build the best and most integrated, strongest, best quality hospital systems in market.

You've invested a ton in big data, which we haven't heard about on these calls.

And presumably, you've done that to add to the value creation on a day-to-day basis and forward.

So Milt, can you frame what the strategy is in terms of -- it sounds like you're adding to the usual day-to-day what we've come to expect from HCA, outstanding execution in brilliant markets.

But it sounds like you're adding another leg to the stool and that there are more things that could come to play next year or the year after from the perspective of strategy the company is pursuing.

So please enlighten us.

Sheryl, this is Milton.

So we have been more acquisitive this year.

We've had more opportunities, and you know our company in that we're not about acquiring hospitals just to have a certain number of hospitals.

We look to acquire hospitals in markets where we see long-term positive health care demand growth opportunities.

And we typically want to have a relative amount of market share when we go into a new market.

And Savannah gives us that.

As I've said in my comments, we hope to close on Savannah by the end of the year, and we're excited about the opportunity to go into a new market.

We've added several other hospitals this year.

Those hospitals have been more complementary to our existing markets, like Houston, Dallas-Fort Worth, San Antonio and Jacksonville.

And we'll continue to look for those opportunities.

We -- today, our pipeline for acquisitions is very good.

I've said, I think the last call, it's probably the best pipeline we've had in maybe 15 years or 20 years.

And so -- I'm talking about more quality opportunities.

So we continue to look for those and add that to our strategy going forward.

With respect to big data, there we have invested quite a bit, and it's already contributing.

Where you see the contribution, we see it in a number of ways, but primarily and most importantly, we see it in the quality and safety of care that we're able to provide.

How we're using our clinical data to improve care in our hospitals is something that we're making great strides in.

And again, I think we're just getting started.

I think the industry is just getting started there.

But we're making a difference today.

We're saving lives with treatment of sepsis, blood utilization and a number of other areas.

So we'll continue to invest in that area and continue to reap benefits from that for our patients.

And of course, that attracts great positions, which, of course, I think, contributes to our growth strategy as well overall.

So all that is part of our strategy, Sheryl.

I think that we'll continue to look for growth opportunities through acquisitions and also growth opportunities through using proprietary information like our big data in how we can use that to continue to leverage our position in the markets.

That's great.

Jon Perlin's here, our Chief Medical Director.

Do you want to add anything to that?

Sure.

Sheryl, thanks for the question.

We're very excited about using the data generated as a byproduct of patient care to fuel continuous improvement, better care, greater efficiency and growth.

We have the privilege of 28 million patient encounters every year.

And those 28 million patient encounters generate a lot of big data.

Those data can peek forward in improving the care of the individual patient, giving them personalized opportunities for precision medicine.

But they also peek forward into our operations to give us insight into ways we can manage the business better.

For example, we have work going on right now to predict demand in the emergency room and improve our managing of staff, in turn yielding better care and better efficiency.

In the area of efficiency, we also tap into our unstructured data.

We use natural language processing now to automate our cancer patient navigation.

306 cancer navigators used to spend 70% of their time finding patients.

They now spend 70% of their time taking care of patients, which helps them not only alleviate anxiety to provide better care, but improves the efficiency by keeping those patients in our system as we meet their needs within different parts of the HCA family.

We use these data to feed into operational dashboards, and that's reduced the length of time on ventilator and that allows us to increase our effective capacity.

And so we're using this as an ongoing effort to really create a virtuous cycle of learning and improvement.

Thanks for the question.

We'll take our next question from Brian Tanquilut with Jefferies.

A question for you on capital deployment.

I think back in 2015, we talked about an elevated CapEx program that ends this year.

So first, how are you thinking about sustaining that or pushing that through to 2018, especially given the growth algorithm that you guys laid out?

Is that something that you expect to continue and to stay at that level?

Or are you reshifting the capital focus towards acquisitions to plug the growth from what seems to be a slowing organic outlook?

All right.

Milt, do you want to...

Yes, (multiple speakers) you may want to add on Bill.

Well, our capital expenditure program, we've been stepping it up.

It will hit approximately $3 billion this year.

I would expect, again, for 2018 that it will continue at that level or even more.

Obviously, some of the acquisitions that we've made, we'll have some capital investments there on top of our base of hospitals and markets that we have.

So -- and after we look beyond 2018, we do have more flexibility in our capital budgeting as far as commitments.

So we'll judge that as we go through the coming months and quarters as to the proper amount of investment.

But we will continue to make investments.

As you know, our growth story has largely been an organic growth story.

And again, as I mentioned, we're in great markets with population growth, and we expect demand.

So I think you'll continue to see us invest.

But beyond next year, we'll wait and see, but we do have more flexibility with respect to capital investment.

We'll go next to Lance Wilkes with Sanford Bernstein.

I just wanted to know what your outlook was for 2018 commercial managed care rate increases compared to 2017.

And then kind of related to that, what you're seeing as far as narrow network strategies and/or your taking risk in those kind of commercial managed care sorts of patients?

All right.

Sam, do you want that one?

At this particular point in time, the company is about 80% contracted for 2018, 75% to 80%, at almost identical terms to 2017.

So we're around 4% on our pricing trends with our commercial book of business and we're about 35%, 40% into 2019 at about the same number.

And we're starting to paint that a little bit differently, because we think there are certain reasons to be a little bit more circumspect about 2019 and 2020 with respect to the need for some pricing adjustments possibly.

But as it relates to narrow networks and risk taking, I would say, in general, not a lot has changed.

We're not seeing significant narrow network development outside of the exchanges where we have been operating inside of that model ourselves, as has some of our competitors.

Clearly, there are evolving models in certain markets at different levels around accountable care organizations and other models such as that.

We have a number of those within our portfolio of offerings with payers and such.

So there's not broad-based movement, though, on those fronts on the commercial book of business.

I would say on the Medicare Advantage side of the equation, there tends to be more deeper penetration of those type of things than there is on the commercial side.

So we're not seeing any significant movement, though, across the company that would suggest a major structural change in the near term, possibly in the intermediate term in some markets, but again, not across 42 different markets.

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

Bill, back to the comment on nurse turnover, I'm just maybe curious entering 2018, what some of these newer initiatives, resources or strategies you have around your programs.

I think a couple of years ago you were pretty successful onboarding physicians early into the organization.

I feel like you kind of perhaps maybe referenced something larger -- a larger focus on something for the company.

So just maybe any comments just on the nurse programs.

So Whit, this is Sam.

Let me take this.

We're really pleased with where we are with our initiatives around nursing in general and specifically around nursing turnover.

As Bill indicated, we are -- we have improved our nursing turnover in about 15 months, 18 months by 200 basis points.

Our nursing contract labor for the quarter, the spend on nursing contract labor, not other components of contract labor in the company, was actually down in the third quarter on a year-over-year basis.

So we're very encouraged by that trend.

We think we still have headroom in a number of RN retention initiatives that will drive that metric down even further.

I'll tell you, we just kicked off a second iteration of our nursing strategy Milton, Jane Englebright and I did the other day for the whole company.

We have a very robust nursing agenda that, we believe, is going to ultimately differentiate HCA further from a nursing standpoint.

At our core, the company is a nursing company.

We provide nursing care in the ERs, in the ORs, on the floors, in our cardiac cath labs, whatever the case may be.

And we are seeing and finding ways to leverage what I call the HCA Way to improve nursing.

Part of that is creating organizational capacity for improvement.

Part of that is standardizing technology on the floors so that our nurses can spend more time in the bed -- by the bedside with our patients.

And an example of that is we acquired a company a few years ago that had some -- a unique technology that allows us to communicate within our nursing environment more effectively with the clinicians, more effectively with physicians and so forth.

We're about 1/3 of the way through rolling that particular technology out.

And then I'll tell you the last thing is really working with our nurse managers and our nurses to deal with pain points that prevent them from being as successful as they want to be.

We think this is all connected to onboarding nurse residency programs that we've evolved in the company and ongoing clinical education, which we believe will produce a more competent workforce, a more capable workforce, a more efficient workforce, generating better patient outcomes, clearly greater physician confidence, as Milton indicated a minute ago, and we ultimately think driving more volume.

So our nursing initiative is being resourced very comprehensively, and we think there's a lot of opportunities for improvements in what we're doing inside of our facilities.

We'll take our next question from Matt Borsch with BMO Capital Markets.

Yes.

I was hoping maybe you could just talk -- I know you were pointing to a number of the long-term growth drivers.

When we think about the demographic shift, how do you think about the positive impact clearly from that aging trend, which is very strong, versus the offset of the mix shift to -- from -- sorry, to lower Medicare reimbursement?

All right.

Anybody want to take a swing at that?

Well, without putting math -- this is Bill.

Without putting math to it, we've been seeing this trend of demographic change, and it's coupled with higher utilization.

But as we've talked about, we've seen some changes between governmental and commercial mix.

I don't think that we're projecting that to be materially different in terms of a year-over-year trend than what we've seen.

And so we've got strategies around the managed care and commercial side to try to manage through that as well as just our overall effort to gain commercial market share.

So it kind of offsets that underpinning migration that you have from commercial to governmental payers.

Do you (multiple speakers)

Sorry, I didn't get that.

No, I was just going to ask, is it a net -- I mean, is it still a net positive when you factor that all in, in terms of, on one hand, the aging trend, on the other hand, that Medicare pays less?

I mean, clearly, as utilization grows, as people age through those continuums, that's going to generate more demand for us.

So we can continue to -- as we continue to see that trend, I think it will be a net positive.

The one thing that, I think, is important is, when you look at our markets, our forecast for commercial demand, not just overall demand, the overall demand is being stoked, if you will, by the aging baby boomers and a few other components.

But the commercial demand side of the equation, at least for HCA markets, we believe, is still going to grow also.

And it won't grow at the composite number, but we believe it will grow somewhere between 0.5 point and 1 point.

And so if we can maintain market share or grow market share inside of that overall demand picture, then that obviously compensates for some of the margin dilution, if you will, that comes from a Medicare patient, which is obviously less profitable than a commercial patient.

So that's how we're thinking about it.

We have to ultimately grow or maintain our market share on the commercial side to make the model work.

We'll take our next question from Ana Gupte with Leerink Partners.

On the 2% admissions growth normalized, how do you think about the mix shifting to ambulatory and moves out of the hospital ED to urgent care?

We have United saying that they can get 50% lower bed utilization in their OptumCare markets, and they see about 90% of ED visits possible in urgent care.

And is that trend slowing down?

Or is it accelerating?

And how is that factoring in into your 2%?

Let me give -- this is Sam.

Let me give you a couple of metrics here.

For the quarter, and this is pretty consistent for the year, our lower 3 acuity levels in our emergency rooms has declined 3%.

Our upper-level acuity visits -- upper 3 levels has grown 3.8%.

So we've actually seen more growth on the high end than we have -- obviously, we've had declines on the low end.

Our pricing in our emergency room tends to be stepped up based upon the acuity.

And so from that standpoint, we're growing our higher acuity, higher-priced emergency room visits.

We're seeing declines in some areas on the lower acuity.

So the revenue production coming out of our emergency rooms is still very, very strong.

To suggest that 90% -- if I heard you correctly, emergency room visits can be put into an urgent care, there's no way that can happen.

It's not possible.

There's too much acute activity on the emergency room side for that to occur.

We have urgent care centers developing across HCA, the platform as well, as an extension of our network.

I think we're up to almost 100 urgent care centers, and they're very complementary to our overall networking position.

And we do think for certain patients and in certain situations, it's a better center and a better setting for care than the emergency room, obviously.

But they are very complementary, and they're very important to the marketplace.

They're very important to the network, and they're very important to the payers in having access to a broad array of facilities, both urgent care and emergency services.

So that trend has sort of stabilized, I'll say.

There's not much difference over the last few quarters and where the acuity has gone within our emergency room and what the trends have been, but we'll just have to see how that plays out from one market to the other.

There are differences in some markets, you're right.

There could be some differences in how that plays out, but broadly across the company, those are the big trends.

All right.

Ana, thank you.

Time for just a couple more questions.

We'll go next to Chris Rigg with Deutsche Bank.

Just wanted to come back to the same facility uninsured admissions increases.

It seems like it worsened a little bit sequentially in the quarter.

Are you guys trying to say that most of that or all of that is explained by declining ACA volumes?

And if not, what other dynamics are in play at this point?

Yes.

This is Bill.

So we reported 6.4% on the quarter.

I think we're running 5.7% year-to-date, so it did jump on us a little bit.

But I really don't judge that to be a material jump as we went into 2017.

If we could keep our uninsured volume in that mid- to high single digits, that's kind of what we anticipated.

As we've stated before, 70% of our uninsured volumes, Texas and Florida.

But we're not correlating that to the drop in the health insurance exchange.

I think that's just kind of an underlying number that we're seeing.

At the 6% level, 6.5%, I think that's within a historical range that we expect.

Remind you that the impact of the growing uninsured is our variable cost to serve that.

And at that mid-single-digit level, I think that's within the confines of our overall expectations and guidance.

Thank you, Chris.

One last question.

We'll go then to Sarah James with Piper Jaffray.

Can you give us some context around where HCA sits now in some of these shifting markets?

So how much of your current inpatient admissions or revenue is related to procedures that can also be done in outpatient?

And same for ER, how much of the ER revenue or admissions is currently in low acuity?

On the ER question, about 45% to 48% of our ER visits are low acuity.

And obviously, the balance of that is in the upper 3 acuity levels, so a little bit more on the upper side than the lower side.

To suggest that there's inpatient procedures that ought to be done as outpatient, I don't see that as the case at all.

I mean, there's all kinds of protocols from a governmental standpoint as well as from a commercial payer standpoint around approving procedures that are done in the inpatient setting and/or the outpatient setting.

So that's really not a phenomenon that, I think, is out of sorts.

I'll tell you, there's always movement from inpatient to outpatient that's in our trend.

It's been there for a decade or so.

But there are also new technologies that are driving inpatient activity.

We've seen that in cardiovascular care and in other aspects of different service lines.

So there's always this in and out that goes inside of these 2 components of our business, but we aren't seeing any unique trends from inpatient to outpatient.

There are certain movements in gynecology services, some very fringe movements in orthopedic services, but they're not anything that's so substantial that's going to disrupt the revenue stream on the inpatient or overly accelerate the revenue stream on the outpatient, at least in our judgment.

All right.

Sarah, thank you.

And I want to just thank everyone for being on the call.

If you have any further questions, feel free to give Mark a call.

Thank you so much.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.