美國醫院公司 (HCA) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the HCA Fourth Quarter 2017 Earnings Conference Call.

Today's conference is being recorded.

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

Please go ahead, sir.

All right.

Thank you, Tony.

And good morning, everyone.

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

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

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

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

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

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

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

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

On this morning's call, we may reference measures such as adjusted EBITDA and net income attributable to HCA Healthcare, 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 Healthcare to adjusted EBITDA is included in the company's fourth quarter earnings release.

As always, the call is being recorded.

A replay will be available later today.

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

All right.

Thank you, Vic, and good morning to everyone joining us on our call and webcast this morning.

This morning, we issued our fourth quarter and full year 2017 earnings release.

And this morning's release also included our announcement of the initiation of a regular quarterly dividend, our 3-year capital expenditure plan and guidance related to 2018 earnings expectations.

Before discussing the release in certain details for the quarter, I want to take a few minutes to reflect on our 2017 performance.

During 2017, we continued to invest in our growth agenda as we focused on adding access points to our networks, broadening service line capabilities and expanding our depth in clinical service offerings.

Over the course of the first 3 quarters of the year, our results were challenged by lower-than-expected volume growth and from losses associated from the effects of hurricanes Harvey and Irma.

We closed 2017 with a solid performance in the fourth quarter with same facility adjusted admission growth of 2.3% over last year's fourth quarter.

Adjusted EBITDA growth was 7.1% over 2016 fourth quarter, and we finished the year 2017 with adjusted EBITDA up slightly over 2016.

We believe our fourth quarter results position us well as we go into 2018.

On the cost side, I believe expense management was well executed, especially the improved results throughout 2017 in (inaudible) and turnover rates and contract labor.

Labor rate growth was in line with our expectations for the year.

Our clinical agenda remains robust, and I am very pleased with our continued improvements in clinical outcomes as our investments in our clinical excellence programs are positively impacting care across HCA.

Based on the latest Leapfrog quality ratings, 70.2% of HCA hospitals received a grade of A or B, while only 59 -- I'm sorry, 55.9% of non-HCA hospitals achieved such ratings.

We also saw improvements in our patient experience performance in 2017.

We continued to advance technology initiatives in 2017.

Big data and mobility initiatives led the company's technology project portfolio.

The use of our continuously expanding clinical data warehouse supports our clinical excellence program and positions us well for emerging approaches like artificial intelligence.

Over the next 3 years, the company plans to deploy approximately 100,000 iPhones as part of our nursing technology agenda.

Our physicians increased their mobility use by more than 75% in 2017 as we continued to expand functionality to improve their workflow and access to information.

We believe our emerging mobility capabilities and our clinical insights from our clinical data warehouse provide greater physician and nursing engagement and improved patient outcomes.

With respect to capital allocation in 2017.

We continued our balanced approach by investing in capital expenditures in our existing markets, repurchasing our shares and investing in acquisitions.

We invested just over $3 billion in capital expenditures in 2017.

We placed $1.1 billion of new capital in service in 2017 and project we will place $1.7 billion of new capital in service in 2018.

We repurchased $2.05 billion of our stock in 2017 and expanded our health care footprint by acquiring 8 hospitals and other health-related assets for $1.2 billion.

Now moving to the fourth quarter.

We finished the year on a solid note, with fourth quarter EBITDA -- adjusted EBITDA of $2.362 billion, a record quarter for adjusted EBITDA.

I will leave further discussion of performance in the quarter for Bill and Sam, but we're pleased with the overall results in volume, revenue growth and expense management during the quarter.

We also remain confident in our strategies and believe they will position us well for the future.

Moving to cash flows.

We generated $5.426 billion of cash flows from operating activities in 2017.

We invested $3 billion in capital expenditures, distributed $448 million to noncontrolling parties, producing free cash flow of approximately $2 billion.

And as I mentioned earlier, we repurchased just over $2 billion of our stock in 2017.

HCA repurchased approximately 25 million shares of our stock or approximately 7% of our outstanding shares since the beginning of 2017.

As a result of the recent passage of the Tax Cuts and Jobs Act, we currently estimate the company's effective tax rate in 2018 to be 25% and estimate that the reduction in cash taxes in 2018 to be approximately $500 million.

It is our plan to reinvest these expected savings into our markets and into workforce development.

This morning, we announced an increase in our capital spending plans for 2018 through 2020.

Capital expenditures over the next 3 years are expected to increase by almost 30%, $2.3 billion more than the previous 3 years, to approximately $10.5 billion.

We are making these investments to add capacity, improve facilities, add new facilities and enhance technology.

We anticipate these expenditures should drive growth and job opportunities.

With respect to workforce development.

The company is increasing investments in 4 important areas over the next few years that we believe will create better opportunities for career growth for our employees and better capabilities to serve our patients.

These areas include: one, investments in educational programs to improve the clinical abilities of our nurses and other caregivers; two, tuition reimbursement for employees to support advancing their educational opportunities; three, scholarship programs for qualifying employees; and fourth, an expanded family leave program.

We anticipate spending up to $300 million over the next 3 years in these areas.

We believe these programs will help improve patient experience and create more free opportunities for employees.

This morning, we also announced the board has declared a quarterly dividend of $0.35 per share on the company's common stock.

The dividend will be paid on March 30, 2018, to stockholders of record on the close of business on March 1, 2018.

The initiation of our quarterly dividend demonstrates our confidence in the financial strength of the company and the consistency of the cash flow it generates.

The announcement today reinforces our commitment to delivering value to shareholders while investing for future growth.

I'll close my comments with a couple of thoughts on 2018 guidance included in our release this morning.

With respect to adjusted EBITDA, we expect to earn $8.45 billion to $8.75 billion in 2018, and our guidance assumes 2% to 3% volume growth, reasonable pricing and well-managed expense growth.

I'm looking forward to 2018 and believe the company is well positioned to achieve our goals for the year.

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

Great.

Thank you, Milton, and good morning, everyone.

I will cover some additional information relating to the fourth quarter results and review our 2018 financial guidance.

Then I'll turn the call over to Sam for some comments on operations.

We are pleased with the fourth quarter results.

Volume, intensity and good expense management led to a solid quarter and a strong finish to the year.

For the quarter, adjusted EBITDA increased 7.1% to $2.362 billion, up from $2.206 billion last year.

Adjusted EBITDA margin in the quarter was 20.4% versus 20.7% last year.

However, same facility adjusted EBITDA margin increased 20 basis points compared to the prior year's fourth quarter.

In the fourth quarter, our same facility admissions increased 1.4% over the prior year and equivalent admissions increased 2.3%.

During the fourth quarter, same facility Medicare admissions [and the equivalent admissions increased 3% and 4.4%], respectively.

This included both traditional and managed Medicare.

Managed Medicare admissions increased 6.4% on a same facility basis and represented 34.5% of our total Medicare admissions.

Same facility Medicaid admissions and equivalent admissions declined 0.8% and 0.6%, respectively, in the quarter.

Same facility self-pay and charity admissions increased 6.4% in the quarter, representing 7.9% of our total admissions compared to 7.5% last year.

Managed care and other, including exchange admissions, declined 0.5%, and equivalent admissions increased 0.5% on a same facility basis in the fourth quarter compared to the prior year.

Same facility emergency room visits increased 3.4% in the fourth quarter compared to the prior year.

Intensity of service or acuity continued to increase in the quarter, with our same facility case mix increasing 5% compared to the prior year period.

Same facility inpatient surgeries increased 0.6%, and outpatient surgeries increased 0.8% from the prior year.

Same facility revenue per equivalent admission increased 3.5% in the quarter.

Same facility hospital-only managed care and other revenue per equivalent admission increased 6.8% in the quarter.

This increase is mostly explained by higher acuity as our same facility managed care and other case mix increased 4.8% compared to the prior year.

Same facility charity care and uninsured discounts increased $660 million in the quarter compared to last year.

Same facility charity care discounts totaled $1.32 billion in the quarter, an increase of $280 million from the prior year period, while same facility uninsured discounts totaled $3.78 billion, an increase of $380 million over the prior year period.

Same facility operating expense per equivalent admission increased 3.3% compared to last year's fourth quarter.

Same facility salary, wages and benefits per equivalent admission increased 2.7% over the prior year period, while same facility supply expense per equivalent admission increased 2.6% over the prior year.

Same facility other operating expense per equivalent admission increased 5.2% over the prior year period, primarily reflecting increases in various professional fee costs.

On health reform, our results have remained fairly consistent throughout 2017.

In the fourth quarter of 2017, we saw approximately 12,100 same facility exchange admissions as compared to the 12,300 in the fourth quarter of 2016.

For full year 2017, our health exchange admissions declined approximately 4% over 2016 levels and represented about 2.6% of our total admissions.

Our health exchange ER visits declined approximately 2.5% for the full year of '17 and represent about 2.3% of our total ER visits.

Health reform activity was generally in line with our expectations.

As reported, earnings per share for full year 2017 was $5.95 as compared to $7.30 in the prior year.

2017 results include a noncash increase in the company's provision for income taxes of $301 million or $0.81 per diluted share related to the estimated impact of the Tax Cuts and Jobs Act on our deferred tax assets and liabilities.

This estimate may be refined as further information becomes available.

In addition, the impact of the third quarter hurricanes unfavorably impacted results by an estimated $140 million or $0.24 per diluted share.

The company also recognized an $82 million or $0.22 per diluted share tax benefit related to employee equity award settlements in 2017.

2016 earnings per share include benefits of $0.39 due to the Kansas City legal settlement, $0.41 due to tax benefits for employee equity award settlements and $0.13 due to the completion of federal tax audits for 2011 and 2012.

Let me touch briefly on cash flow.

In the fourth quarter, cash flow from operations was $1.734 billion compared to $1.699 billion last year.

For full year '17, cash flow from operations was $5.426 billion, down $227 million from $5.653 billion last year, primarily from working capital changes.

Capital spending for the year increased to $3.015 billion from $2.760 billion in 2016 as we continue to invest in long-term growth opportunities for the company.

Cash flow from operations of $5.426 billion less capital spending of $3.015 billion and distributions to noncontrolling interest of $448 million resulted in free cash flow of $1.963 billion for 2017.

And as Milton mentioned, we completed a little over $2 billion of share repurchases during the year.

We had approximately $1.8 billion remaining in our $2 billion authorization as of December 31, 2017.

At the end of the quarter, we had $2.047 billion available under our revolving credit facilities, and our debt to adjusted EBITDA ratio was 4.0x.

These cash flow and balance sheet metrics continue to be an important strength for the company.

So with that, I will move into a discussion about our 2018 guidance.

Highlighted in our earnings release this morning, we estimated our 2018 consolidated revenues should range from $45 billion to $46 billion.

We expect adjusted EBITDA to be between $8.45 billion and $8.75 billion.

Within our revenue estimates, we estimate equivalent admissions growth to range between 2% and 3% for the year and revenue per equivalent admission growth to range between 2% and 3% for 2018.

We anticipate our Medicare revenues per equivalent admission to reflect the composite growth rate of approximately 1.5% to 2%, factoring in market basket changes, ACA reductions as well as some anticipated intensity increases.

Medicaid revenues per equivalent admissions are estimated to be mostly flat year-over-year.

Managed and other revenues per equivalent admissions are estimated to grow between 4% and 5%.

And we anticipate operating expense per adjusted admission growth of approximately 2.5% to 3%.

Relative to other aspects of our guidance.

We anticipate cash flow from operations between $6.2 billion and $6.5 billion.

We anticipate capital spending of $3.5 billion for 2018 as we seek continued opportunities to invest in our markets and in support of key strategic initiatives.

We estimate depreciation and amortization to be approximately $2.2 billion and interest expense to be approximately $1.8 billion.

Our effective tax rate is expected to be approximately 25%.

And lastly, our average diluted shares are projected to be approximately 355 million shares for the quarter, and earnings per diluted share guidance of 2018 is projected to be $8.50 and $9.

Earnings per diluted share guidance includes an estimated $50 million income tax benefit or $0.14 per diluted share related to employee equity award settlements and an estimated $480 million or $1.35 per diluted share related to the impact of the Tax Cuts and Jobs Act but does not include losses or gains on sale of facilities, losses on retirement of debt or legal claim costs.

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

All right.

Thanks, Bill.

Good morning to everybody.

I'm going to provide more detail on our volume results for the quarter as compared to the fourth quarter of last year.

My comments will focus on our same facilities domestic operations.

9 of 14 divisions had growth in admissions.

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

And conversely, our East Florida and Far West divisions were weak.

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

11 of 14 divisions had growth in adjusted admissions.

12 of 14 divisions had growth in emergency room visits.

Freestanding emergency room visits grew 20%, while hospital-based emergency room visits increased 1.6%.

Once again, growth was stronger in higher acuity visits, but we did see some solid growth in lower acuity visits also.

Admissions through the emergency room grew by 2.5%.

The company ended the year with 72 operational freestanding emergency rooms.

We had 63 at the end of last year or 2016.

Currently, we have 12 more that we expect to open in 2018 and another 21 in 2019.

Trauma and EMS volumes grew by 6% and 3.5%, respectively.

Inpatient surgeries were up 1.1%.

Surgical admissions were 28% of total admissions in the quarter, consistent with the prior year.

Surgical volumes continued to be strong in cardiovascular and orthopedic service lines.

9 of 14 divisions had growth in inpatient surgeries.

Outpatient surgeries were up also 1.1%.

Volumes were up in both our hospital-based and freestanding ambulatory surgery centers.

Behavioral health admissions grew 3.2%.

Rehab admissions grew 5.7%.

Cardiology procedure volumes, both inpatient and outpatient combined, were up 2.5%.

Births were down 2.4%, which was consistent with the trend we had seen for the entire year.

Neonatal admissions, however, increased slightly at 0.6%.

Urgent care visits for the company were up 10% on a same facilities basis and 29% in total.

The company ended the year with 123 urgent care centers in its networks, up from 80 at the end of last year.

We anticipate another 15 to 20 centers will open in 2018.

To recap the year, volumes across most categories and most divisions continue to grow.

2017 was the 10th consecutive year of same facilities admissions and adjusted admissions growth for the company.

Growth this year, as you heard, was slightly off our plan.

Most of the variance was explained, we believe, by lower birth rates and less growth in emergency room visits.

We remain confident about the prospects for long-run growth across HCA portfolio of markets.

As I've stated before, we believe health care demand for services in our markets will over time grow on average around 2% to 2.5% annually.

We believe this demand is driven by the following factors: first, population growth; second, utilization increases, driven by the aging of baby boomers; third, growth in chronic conditions; and fourth, strong and diverse market economies, resulting in job growth.

As you heard, we are investing more in our growth agenda with a planned ramp-up in capital spending.

We believe this increase in spending is compelling for a variety of reasons.

First, we need to address inpatient capacity constraints.

Inpatient occupancy levels for the company ended the year at an all-time high of almost 72% of operational beds.

Over the past 3 years, we have added approximately 1,350 inpatient beds to our markets.

We expect to add approximately 2,000 beds in the next 3 years.

Second, within our existing markets, we are adding more outpatient facilities and creating a comprehensive and diverse array of facility offerings.

Currently, we have approximately 1,800 outpatient facilities and clinics across the company.

We estimate that we should have over 2,000 by 2020.

And finally, we are investing more in clinical technology and other types of technologies to enhance quality outcomes and experience for our patients, to improve the environment in which our nurses deliver care and to make our facilities the preferred place to practice for physicians.

In sum, we believe our capital spending should allow us to capitalize on the growth in demand, drive gains in market share and yield a positive return.

I said this last quarter and I want to say it again, we continue to refine and enhance our efforts in our execution systems to improve and grow our business.

We believe these refinements and enhancements will deliver value for our patients and physicians, create a better environment for our employees to work, allow us to compete more effectively in a dynamic marketplace, sustain growth and thus, drive shareholder value.

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

All right.

Thank you, gentlemen.

One quick thing Bill did want me to correct when he was giving you the average diluted shares and guidance for 2018, 355 million, I think he said quarter, but he obviously meant full year.

All right.

With that, Tony, if you come on and poll for questions.

(Operator Instructions)

(Operator Instructions) We'll go first to Frank Morgan with RBC Capital Markets.

Sam had made a comment about attributing some of the weakness in 2017 to softness in birth rates and ER visits.

So when you go back and look at your guidance for same-store growth in 2018, are you assuming that those particular trends that caused the weakness last year improved?

Or is it related to some of the CapEx investment or some changes in the local competitive environment?

And then also, just any comments on the 340B payment.

Had that built into your assumptions?

Okay, thank you.

Bill, you want to do 340B, and then Sam will talk about...

Yes.

Frank, 340B would be built into our 1.5% to 2% Medicare growth rates that we talked about.

Sam?

We are assuming at some level, Frank, that there will be a slight rebound in both of those areas and that will help prop up the overall demand.

We do believe, however, that there are other factors driving our guidance with respect to volume, and that is capital spending, yes, our investment in outpatient facilities and physician strategies also and numerous other initiatives that have been sort of our core approach to the market all along.

And we think those elements will allow us to recover market share gains again and ultimately, compete, I think, in a marketplace that we believe is starting to recover slightly from where it was over the past 18 months.

And that's sort of our thinking.

We'll go next to A.J. Rice with Crédit Suisse.

Maybe I'll just try to ask about the M&A environment, consolidation environment.

You're obviously coming off a great year on acquisitions, a pickup from recent years.

Can you just tell us what you're seeing in terms of additional discussions?

And then on the other flip side to the whole consolidation story is what we're seeing with some of the nonprofit big systems consolidate.

Does that present any opportunities or challenges for you guys?

What was your perspective on that?

All right, A.J. Thank you.

I think Milt wants to lead with that one.

Yes.

With respect to the pipeline, A.J., we continue to have a lot of potential transactions that we're looking at.

As you know from following HCA, we're very disciplined with respect to acquisitions.

We set a pretty high bar as far as the characteristics of a market and asset positioning within a market.

So -- but we do have a pipeline.

We're pleased with the number of transactions we were able to complete in 2017.

Of course, we have the Savannah Memorial Health coming online probably within 2 days, on the 1st of February, and we're very excited about entering that new market and the prospects for our future in Savannah.

With respect to some of the other consolidation activities, we don't see that having, at this point, a major impact on our outlook.

We're not -- when you think about those consolidations, we're not adding new competitors in any of our markets.

They do maybe benefit from scale, but again, here, over the intermediate term, we don't foresee those transactions that have been announced having an impact on our outlook.

Next to Brian Tanquilut with Jefferies.

Sam, you talked about expanding the outpatient side as part of your CapEx strategy.

How should we think about what the outpatient strategy is, meaning what areas should we be looking at in terms of where the capital is going?

And how do you view that in the grand scheme of things as the health care environment changes, with United rolling out MedExpress and Walgreens facilities and CVS, Aetna as well?

Sam?

First, let me say this, when you think about the total spend that the company is incurring and forecasting over the next few years at $3.5 billion, obviously, the biggest component of that is on our inpatient chassis, where we have to add beds and other infrastructure capabilities.

The aspect of outpatient facilities and such is obviously low capital cost per unit.

And so I think in the overall scheme of our capital budget, outpatient will never supplant, not never, that's too strong, unlikely to supplant sort of our spending on our inpatient facilities.

It's important to understand that HCA has roughly 180 hospitals across the company.

And like I said in my comments, we have about 1,800 outpatient facilities already and expect that to grow to about 2,000 in 2020.

The way we think about our outpatient strategy is looking at the hospital as an individual entity with outpatient offspring, if you will.

For example, freestanding emergency rooms attached to certain hospitals; physician clinics attached to certain hospitals; urgent care, wrapped around all of that, attached to certain hospitals and certain components of the market.

So we look at all of these microsystems, if you will, and they're centered around this notion of us needing to be comprehensive, including ambulatory surgery and certain imaging capabilities in an outpatient environment.

The outpatient space has always been competitive.

In many markets, there is no certificate of need on outpatient facilities today.

And we continue to be, we think, responsive to the marketplace with our approach in our strategy.

Our belief is that having a fully integrated network of inpatient facilities, emergency rooms, outpatient facilities, physician clinics is a very synergistic platform for achieving growth, for better patient experience, for technology and information flow and so forth.

And so the care coordination process becomes a better method inside of an integrated system.

And that's how we're thinking about it, and that's why we're investing, I think, consistently on both the inpatient side as well as the outpatient side.

And I'll end with this.

As we grow our outpatient facilities and activities, we have to have downstream capacity available in the inpatient space in order to receive the business that may start somewhere else in our network.

That has been an ongoing effort inside of HCA to improve care coordination and try to keep the patient in the HCA system when they need further care downstream.

So that's our approach.

That's our strategy.

We think it's responsive to the consumer, our physicians and the marketplace as a whole.

Next to Justin Lake with Wolfe Research.

Obviously, a much stronger fourth quarter versus your expectations.

If you have to run through your thoughts on the drivers of upside in terms of splitting it out between volume and price versus the costs, the costs that (inaudible), how would you split that out?

And then if I could just squeeze in a quick question on the interest deductibility.

Can you tell us what the adjustment should be to 2018 EBITDA that you're guiding to?

We should multiply by the 30% number interest deductibility of the tax reform?

I think you might be able to [give it] than the reported numbers.

All right.

Maybe let me take the first question.

To break it down -- I mean, Justin, with the performance we had in the fourth quarter, obviously, the contribution from the improvement in volume, the acuity of that volume yielding a very good break on the volume on top of a, I think, a highly effective cost management quarter contributed to the upside.

And it's hard to maybe parse it out and break it, but it's one of those quarters where we really were pleased with the performance across all those metrics that are important to kind of produce the sort of result and beat the expectations for the fourth quarter.

But again, I'm very pleased with the management team, our operators in the field and others that really -- like I said in my comments, we saw software volumes in the first part of the year.

We faced the hurricanes.

And then in this fourth quarter, to see solid volumes on top of really effective cost management and, again, the acuity growth in terms of that volume contributing to rates.

So across the board, I think you'd have to give credit to all 3 dimensions for the success of the quarter.

And Justin, this is Bill.

On the interest deductibility, in the EBITDA years , we don't see any phaseout of the interest deductibility of any material nature in the first 5 years of the tax and jobs cut.

Next to Whit Mayo at Robert Baird.

I just wanted to focus back on the process around capital spending a little bit.

Sam, can you just elaborate for how you guys analyze projects, how you prioritize your projects?

And maybe just comment on the new areas of investment, how the returns compare versus historical returns and hurdle rates.

All right.

Sam?

Well, we haven't really changed our process on capital spending for the last 5 or 6 years.

I think we have a very comprehensive approach and a very detailed approach that we believe yields positive returns, and we've got a history of proving that, we believe.

The process, though, begins with, what I'll call, capacity and utilization metrics that indicate to us where we're approaching constraint that might prevent us from being able to grow in a particular market.

And like I said, on the inpatient side, right now, we're running at almost 72% on average, which includes weekends when, obviously, hospitals do not have as many patients in them typically.

Inside of our emergency rooms today, we -- or in 2017, we averaged 88% of our utilization target.

That was our capacity utilization there.

And so those are fairly tight metrics that we start with.

The second thing we do is look at the growth opportunities within the particular market, whether it's a population trend, a physician group opportunity, a particular service line opportunity, a technology requirement, whatever the case may be to support our initiatives, we're evaluating that in the context of that particular market's dynamics.

And then from there, we go through a process that's field based initially, works its way up to me and the team up here where we incorporate a corporate perspectives before we sign off on a particular project.

Our approach, like I said, has been to deliver sufficient capital to ensure that our facilities are maintaining their equipment and their curb appeal appropriately.

That's our routine bucket, as we typically call it.

And that averages probably $1.2 billion to $1.4 billion, let's just say.

Then we have about $250 million or so that we have for our IT initiatives that Milton alluded to in his comments.

And then the balance typically is centered around execution of our growth agenda, whether it's capacity on the inpatient side or outpatient facilities.

Again, we think our model is diverse.

We're not investing in any concentrated fashion in any particular market.

It's very distributed across HCA, number one.

Number two, it's distributed across hospitals within those markets.

Number three, it's distributed across service lines.

So we have a very conservative approach to capital allocation, we believe, across the portfolio of the markets.

And then finally, I'll say this.

Our belief is that adding capital to existing businesses, existing facilities, especially our inpatient operations, is very synergistic.

The fixed costs are largely intact.

The medical staff is already there.

The clinical reputation is there competitively in the market.

And then we have the network around it to support those investments.

And those projects tend to produce very positive returns for us.

We did a study just recently where we went back and looked at all of our major projects over the past 3 or 4 years, and with the exception of a couple of scenarios, we were exceeding our expectations, including an embedded organic growth component.

So we're very pleased with the outcomes of our projects.

It gives us confidence as we go forward and expand the overall spending levels for the company.

Next to Michael Newshel at Evercore ISI.

Can you remind us and sort of size how much EBITDA contribution you're expecting from last year's acquisitions?

And also, how much margin expansion that you're baking into that?

Or what trajectory that you expect the margin on those deals to get up to the existing base?

All right.

So Bill, you…

Yes.

The acquisitions will contribute roughly 70 to 100 basis points of growth next year.

We've factored that into our guidance.

And in the first year, they'll come in at modest margins.

And so there'll be a slight dilution effect overall as a company.

We still anticipate around a margin (inaudible) after those acquisitions.

Next to Chris Rigg at Deutsche Bank.

I just wanted to ask about the London hospitals.

I know they were a pressure point in the first half of '17.

That pressure moderated, I think, in the third quarter.

I'm not sure what happened in the fourth quarter.

And would love to get a sense for how you expect results there to trend in 2018.

All right, Sam.

You want that one?

We did not perform well in the fourth quarter.

It was a little bit below our expectations.

And you're right, we had a better third quarter than previous first half of the year.

But unfortunately, we had a really difficult December in London.

And our results, on a year-over-year basis, were down $12 million when you look at it in U.S. dollars.

So it's not that tremendous.

But we do think we're approaching, I'll call it, the bottom and have the right strategies, both on the top line as well as restructuring our operations over there from a cost standpoint to respond to the marketplace and create a more stable environment for us as we go into 2018.

Next to Ralph Giacobbe at Citi.

Can you talk a little bit about payer mix?

Commercial seemed a little bit better this quarter but still slightly down.

Do you expect -- or what do you assume for commercial volume in 2018?

And then the 6.8% yield on commercial, a pretty hefty number there.

Would you say we should focus more on that metric and sort of the revenue contribution of commercial as opposed to the volume metrics, just given the push by managed care to kind of push more the lower acuity volume out of the inpatient setting?

All right.

Ralph, thank you.

Bill?

This is Bill, I'll start, and then Sam or Milton can add on.

We are generally pleased with the fourth quarter.

We did see an improvement in the payer mix.

As we mentioned, we had a 0.5% growth in our managed and other on an adjusted admission basis.

I'd say, going into 2018, we would expect a modest improvement in our commercial trends for next year.

We've got that factored into our guidance.

You're right, the fourth quarter on a revenue per adjusted admission was high.

It was all driven by acuity in case mix, as we mentioned.

I think, over the longer period of time, as we indicated in our guidance that, that will settle in more in a 4% to 5% range over a period of time.

And that's pretty consistent with what we've seen over the past couple of years.

So that's what I think is the best case to model our commercial book to look at.

Our commercial rates, I mean, are consistent in '18 versus last couple of years.

So again, the case mix in this quarter obviously was a boost to that rate.

But as Bill said, we think somewhere in that 4% to 5% zone would be a reasonable expectation.

Next to Kevin Fischbeck, Bank of America.

I just wanted to ask a little bit about tax reform and how you guys are thinking about it because it sounds like you're looking for about $0.5 billion of improved cash flow from tax reform, but you're taking up your CapEx number by $0.5 billion this year.

And it looks like on a 3-year number, more like $900 million over the next few years, but you're not taking up your long-term growth rates.

So it seems like you're kind of spending all the tax reform benefit but not expecting an improvement in the underlying operations.

Can you just talk a little bit about how you're thinking about that and why this increase in CapEx is not increasing your view about the organic growth opportunity going forward?

All right.

Milton, you want to start with that one?

Yes.

I mean, I think we're -- we currently believe that we can grow our business in that 4% to 6% EBITDA -- adjusted EBITDA zone.

The capital that we are investing in, these are long-term investments in our markets.

And we expect them to continue, as we have in recent years, produce solid returns and yields for us.

And if we can accomplish that, again, that's how we intend to grow that 4% to 6%.

And you followed us for years.

We've been historically an organic growth company.

And as Sam has mentioned in his comments, we operate in really very good markets for health care where you see population growth, aging of population, increase in chronic conditions, all the things that Sam mentioned.

And with the capacity constraints that we see in our markets, to continue to grow organically, we have to invest.

And I think we will drive very good returns off of those investments in the markets we're in.

So yes, we're increasing our capital spend, but I think the opportunities for us to sustain reasonable growth for our shareholders is -- remains intact and not changing our growth expectations.

But again, we've been saying a number of years now, we think 4% to 6% is a reasonable zone for us.

With respect to tax reform, you know that we -- as you know, with the free cash flow we're generating, we are able to -- now with adding the dividend, as you think about returning cash to shareholders, we have been historically doing that with share repurchase.

This further diversifies our approach to returning cash to shareholders.

Now with a dividend being a piece of that, very pleased with that.

But also, as you can see, our first priority remains reinvesting back in our existing markets.

And so with the step-up in capital spending, again, pleased to do that and pleased to have that announced, too.

So I think it's a very well-rounded approach to capital allocation and one that I think will yield very good returns for shareholders over the years ahead.

Next to Josh Raskin, Nephron Research.

This is Mary Shang on for Josh today.

I didn't hear anything on the flu, and I'm curious if there was a material challenge to volumes in the fourth quarter.

We've been hearing it's been a more severe season, curious if you're anticipating this continuing into the first quarter.

All right.

Sam, do you like that?

Sure.

The flu contributed somewhere around 0.5% to our admissions statistic in the month of -- or in the fourth quarter.

Most of that did occur in December.

And then for our emergency room visits, I think it was about 0.9% of our activity was attributable to flu.

So there was some modest element of flu activity in the quarter.

But what was interesting, the non-flu volume, as Bill and Milton just spoke to, was incredibly intense and acute, and that's how we were able to deliver case mix index growth in the face of flu growth in the quarter.

So it really spoke to our core business being very strong in the period.

Next to Peter Costa with Wells Fargo.

Back to tax reform again but a little bit of a different take on it.

My question is, how do you see that impacting your conversations with managed care providers in terms of rate negotiations?

And also, how does it impact your views of hospital purchases in terms of purchase price paid since the free cash flow goes up even if the EBITDA doesn't?

All right.

Who wants to take a shot at that one?

We're not anticipating in the short run any significant change in negotiations with the managed care companies as a result of tax reform.

We think there are still certain trends in our business, certain trends in their business, and we don't believe that's going to radically change the discussion there.

And as Milton indicated, we're 85% contracted in 2018 already.

We're roughly 50% contracted in 2019 and around 25% to 30% in 2020.

So we do have some open contracts out there, but we think the discussion is more centered on the core business and not necessarily the tax reform.

And Peter, I would just add that the managed care companies are benefiting from tax reform as well.

So it's not just one side picking up the benefit.

And on the M&A model, let's say, it's a factor in there.

But as Milton talked about, our primary filter on the M&A is make sure we're in a strong market with a strategic asset.

That's our primary focus in the acquisition side.

Clearly, there might be some incremental benefit with historical versus prospective taxes, but that's more secondary in our analysis.

Next to Ana Gupte with Leerink Partners.

So as you look at these volume trends, which are really strong, is this something that's occurring more to HCA and you're picking up more share from your competitors?

Or is this more sort of an industry-wide trend?

And to the extent that its market share shifting with tax reform as the playing field is getting more leveled with the not-for-profits, do you think that should, again, accelerate the volume growth going forward?

All right.

Sam?

We don't at this particular point in time have fourth quarter market share data, so it's difficult to say exactly how the quarter is stacking up from a market share gain standpoint.

Our market share, as I've indicated in the past and as the current data, which is through the second quarter of 2017, indicates it's stable and it hasn't been growing like it did in the previous periods, as we've indicated in the past.

So we're anxious to see what the third and fourth quarter data will show.

We do believe that we have the right approach, however, to delivering market share gains again for the company.

Some of this is connected to all the points we've been making throughout this call.

So we're very confident, we think, in our approach to our systems from one market to the other being able to compete and hopefully gain market share.

What was the last question she asked?

I'm sorry, I was at one more question, shoot.

It's about...

Yes, I think that you're right.

Most of our competitors in HCA's markets are tax-exempt systems that aren't benefiting from the Tax Reform Act that was passed.

And so for us, it does create an advantage by comparison to them, and we think we're trying to utilize that advantage appropriately, as Milton indicated, with investments in our communities and investments in our workforce so that we can deliver a better service to our patients and have the necessary capacity to really benefit from the growth strategies that we have.

Next to Gary Taylor at JPMorgan.

Nice quarter, too, that seems the revenue growth fell into your range, which was good.

My question is about -- [seems] to revenue guidance, the 4% to 6% that you talk about, if we exclude '14 and '15 where the ACA was having a positive impact, really, we have to go back to 2009 since the last time you broached the low end of that same-store revenue growth rate.

So really, you're telling us that you think the business will accelerate, and it's a very different message from what we hear from the rest of the industry.

And the growth headwinds that you've cited aren't new necessarily.

So I guess the question is, how do you have confidence that, that 4% to 6% same-store revenue isn't just incorporating some of the tailwinds you've talked about, demographics, et cetera, but is also appropriately contemplating from the headwinds for hospitals over the next several years?

Yes, when we -- Gary, when we look at our domestic operation -- yes, our same stores domestic operation revenue in 2017 grew by 4.2%, and this was on sort of a slower growth platform than we've experienced in past years.

So I think from the standpoint of total revenue growth, we're in a pretty good spot, we believe, with the guidance and with our experience.

I'm not sure I understand your point vis-à-vis our actual performance this year.

Yes.

And Gary, can I add one more?

You throw out kind of the health reform years, but recall, those health reform years not only did we have the benefit of health exchanges.

But as we said throughout that period of time, our organic non-health exchange was really robust during those period of time.

So I'm not so sure the premise that if you exclude those periods, we're below the 4% as a starting point is -- holds up for us.

Next to Steve Tanal with Goldman Sachs.

A lot of helpful ones have been asked so far, but I guess just to follow up on a couple of points.

I didn't hear sort of the outlook on flu in 1Q.

I mean, obviously, it looks like the flu has accelerated.

If you could just give us some flavor for what you're expecting there and how that impacts the outlook.

And then just on the CapEx plan, any color on sort of threshold IRRs that you could speak to or how you think about quantitatively deploying capital in some of the markets?

And just lastly...

All right, Steve -- yes, Steve, let me just say one thing.

We don't provide guidance in a mid-quarter, so we won't really get into the flu for the quarter.

Obviously, you can see the stats out with CDC and what have you, they are pretty strong, but we don't provide interim quarter guidance.

Bill, you want to answer the rest of that?

On the CapEx, I think, as Sam just described in the different types of capital investments, we clearly go through a pretty rigorous review of those, looking at kind of the market demand, financial returns.

And I would say that every project goes through its own analysis in terms of financial returns and internal rate of returns.

Generally, when you're characterizing those growth investments that are either inpatient capacity or even expansion of our outpatient network, they're meeting above company standards returns.

And again, as we look at it as a portfolio, we think we've got this consistent kind of track record of growing return on invested capital.

So there's really no hard and fast kind of one threshold that we use.

Each project and each type of project would generally stand on its own, but all of them generally would come with attractive returns that we factor into our decision to go forward with the investment.

We'll take that final question from Sarah James with Piper Jaffray.

This is Austin on for Sarah.

So you touched on artificial intelligence in your prepared remarks.

Can you dive a little deeper into how HCA is looking to apply this technology and how that will help you reduce the costs or improve the quality of your care?

All right.

Jon Perlin, our Chief Medical Officer.

Jon?

Well, thanks.

We took the opportunity to use -- meaningful use to replatform in a way that we could capture all of the data for every one of our clinical encounters.

These clinical encounters provide really a lot of fuel for understanding quality and safety as well as efficiency and the capacity for growth.

We use the artificial intelligence to do everything from changing workflow to make it more efficient, for example, supporting patient navigation, to identifying more efficient ways for care delivery.

Early identification of sepsis is such an example.

So it's really fuel for supporting every aspect of our operations.

All right.

Jon, thank you, and Sarah.

We want to thank all of you for joining us and look forward to seeing you in the coming year.

This concludes today's conference.

We do thank you for your participation.

You may now disconnect.