HCA Healthcare Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 24, 2023

There are 19 speakers on the call.

Operator

Welcome to the HCA Healthcare Third Quarter 2023 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 Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir.

Speaker 1

Good morning and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen and CFO, Bill Ruffner. Sam and Bill will provide some prepared remarks and then we'll take questions. Before I turn the call over to Sam, let me remind everyone that should today's All contain any forward looking statements that are based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results differ materially from those that might be expressed today.

Speaker 1

More information on forward looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we will make reference measures such as adjusted EBITDA, which is a non GAAP financial measure, A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare, Inc. Is included in today's release. This morning's call is being recorded and a replay of the call will be available later today. With that, I'll now turn the call over to Sam.

Speaker 2

All right. Good morning. Thank you for joining the call. The business fundamentals for the company were solid in the quarter With broad based volume growth on a same facility basis across our footprint and various service lines, These results reflected continued strong demand for our services and healthy operating margins on a same facility basis. Across most areas of our business, we maintained the operational momentum that we experienced over the past 3 quarters, including continued progress With our labor agenda.

Speaker 2

Unfortunately, our results were unfavorably impacted by our Velasco Hospital Based Physician Venture. Bill will give additional detail on this impact in a moment. We are continuing our efforts to integrate this venture and anticipate implementing additional actions that should improve its operational results over the next few quarters, including less pressure for the company in the Q4. Because of this issue primarily, we have lowered the top side of our earnings guidance for the year to reflect the effects of these losses. It is important to understand that we believe the decision to consolidate Velasco Was strategically imperative in maintaining the overall competitive positioning and capacity offerings of the company.

Speaker 2

As has been the case historically with our teams, I am confident that we will find a pathway forward to mitigate the impact it has had on our results. For the Q3, diluted earnings per share were $3.91 Same facility admissions grew 3.4% year over year. Inpatient volumes were supported by continued Strong acuity and a favorable payer mix with same facility commercial admissions growing an impressive 7%. Same facility equivalent admissions increased 4.1%. This growth was driven by emergency room visits, Which grew 3.5%.

Speaker 2

We are encouraged by our ER revitalization program and the results it is producing for our patients. Outpatient surgeries on a same facility basis grew approximately 1% year over year. Other outpatient categories also grew, including outpatient cardiology procedures, which increased almost 5%. These factors contributed to an increase in same facility revenue of 7.9% as compared to the prior year. In the quarter, we continued to invest significantly in our people with additional investments in orientation programs, Jaylen College of Nursing and Clinical Education Facilities.

Speaker 2

Turnover was stable in the quarter And nurse hiring was the strongest it has been all year. These positive results helped reduce contract labor costs 12.5% as compared to the Q3 last year and 11% sequentially. During the quarter, we maintained available bed capacity. Instances where we could not accept patients from other hospitals Representing only 0.9 percent of total admissions, which is consistent with the rate in the 2nd quarter. We believe the significant investments we are making in our networks, our people and our technology agenda Will provide us with the necessary resources to improve our service offerings and deliver higher quality care to our patients With greater accessibility, I'm proud of our people for what they do every day to deliver on our purpose.

Speaker 2

I want to thank them for their dedication and their overall great work. HCA Healthcare has a disciplined operating culture That we will maintain into the future, this focused approach, which benefits all stakeholders, enhances our ability to execute clinically, Strategically and financially, so let me close with this. We look forward to our upcoming Investor Day on November 9, We will provide more details about the company's approach to driving sustained long term growth and shareholder value. We will also provide some early perspectives on the upcoming year as well as longer term thinking on growth targets. With that, I will turn the call to Bill for more details on the quarter's results.

Speaker 3

Great. Thank you, Sam, and good morning, everyone. I will provide some additional comments on our Consolidated net revenue increased 8.3 percent to $16,210,000,000 From $14,970,000,000 in the prior year period, this was driven by 4.5% growth in equivalent emissions And 3.6% increase in revenue per equivalent admission, same facility revenues grew 7.9%. As Sam mentioned in his comments, the Velasco joint venture had a negative impact of approximately $100,000,000 on the company's adjusted EBITDA in the quarter As well on a year to date basis, a portion of the 3rd quarter results was due to revising our revenue estimates From the Q2 as we began to see claims being paid. This result was not what we are expecting as we are experiencing revenue shortfalls Compared to what we originally modeled, the Velasco operating results had a negative impact on adjusted EBITDA margins of approximately 80 basis points in the quarter and 40 basis points on a year to date basis.

Speaker 3

Going forward, we anticipate the loss from this venture to approximate $50,000,000 a quarter. We are working diligently on multiple efforts to address these results, Including making program adjustments where necessary, deploying efforts to reduce the cost structure and working with payers for more appropriate reimbursement. As we have discussed previously, we have seen subsidy requests increase from contracted hospital based providers. Professional fee expense for contracted providers have grown approximately 20% on a year to date basis. Although we are encouraged, the rate of growth of these payments slowed in the Q3 as compared to the Q2.

Speaker 3

In addition to the mitigation strategies discussed above, We continue to assess other operational adjustments within our cost resiliency programs to help offset some of the impact from these issues. Let me speak to some cash flow and capital allocation metrics. Our cash flow from operations was $2,480,000,000 in the quarter. Capital spending was $1,150,000,000 We paid about $160,000,000 of dividends and repurchased $1,140,000,000 of our stock During the quarter, our debt to adjusted EBITDA leverage ratio remains near the low end of our stated range of 3 to 4 times. As noted in our release this morning, we are updating our full year 2023 guidance as follows: We expect revenues to range between $63,500,000,000 $64,500,000,000 We expect net income attributable to HCA Healthcare to range We expect adjusted EBITDA range between $12,300,000,000 $12,600,000,000 and diluted earnings per share to range between $17.80 $18.50 We expect capital spending to approximately $4,700,000,000 for the year.

Speaker 3

Before we open it up for questions, I'd like to provide some Commentary on our year to date performance. We believe our core business metrics remain solid. Year to date, our same facility admissions have grown 3.3%, equivalent admissions have grown 5.1%, Non COVID admissions have grown 7.5% over prior year on a year to date basis. Same facility ER visits have grown 5 point 7%. Inpatient surgeries have grown 2.3% and outpatient surgeries are up 3.1%, All on a year to date basis.

Speaker 3

These volume metrics have outpaced our original expectations going into the year. Our payer mix trends remain favorable. Same facility managed care admissions increasing 5.3% And Medicare admissions increasing 4.3% on a year to date basis. Medicaid and uninsured admissions are slightly down From the prior year on a year to date basis. Our case mix index has held and increased slightly over prior year And our same facility revenues have increased 6.4% on a year to date basis.

Speaker 3

Our same facility labor cost and supply cost Or below prior year as a percentage of revenue. Through a focused and diligent effort, our operating teams have done an incredible job of addressing the contract labor pressures we had last year. On a year to date basis, our contract labor expense is down 18% Or over $300,000,000 from the prior year. We have confidence that a similar focus and diligent effort Will help address the current physician cost pressures over time. Lastly, when we look at our current adjusted EBITDA guidance for 2023, We think there are several notable items to consider.

Speaker 3

We discussed in our year end call in January COVID support payments, the out of period Texas waiver payment and the 340 impact from 2022, Which all in total approximately $500,000,000 And if you consider the $145,000,000 payer settlement we recorded in the Q1 of this year, As we take all of that into account, we are pleased with the growth rate we've been able to achieve. In addition, our diluted earnings per share, Excluding losses on sale of facilities and losses on retirement of debt has grown 7.2% year to date. So I wanted to take a moment to put this quarter in some perspective. So with that, we look forward to your questions and I'll turn the call over to Frank to open it up. Thank you, Bill.

Speaker 1

As a reminder, please limit yourself to one question so that we might get as many as possible in the queue an opportunity to ask a question. Rhiannon, you may now give instructions to those who would like to

Operator

ask a question. Thank you. Our first Question comes from Kevin Fischbeck with Bank of America. Your line is open.

Speaker 4

Great, thanks. Maybe just want to build on that last Point there. The commentary about the year to date performance being strong is well taken. But I

Speaker 5

guess I got a lot

Speaker 4

of questions about whether There's anything unusual, I guess, in the performance this year. I think people are trying to figure out whether this is a good base to think about future growth or whether there's anything Whether it's in the volumes or the rate or the payer mix that we really shouldn't be expecting to continue. So I guess, is this a good base and Should we think about normal growth off of this? Thanks.

Speaker 2

Kevin, it's Sam. It's our belief that Demand for healthcare remains strong and will remain strong into the future. Just given The population trends that we see in our market, the aging of the baby boomers, as well as chronic conditions, I know there's been a lot of concern about GLP-one and so forth, we think it's way too early for any of that to have an impact on demand in the near term or even the intermediate term. And so from that standpoint, we're really encouraged by what we see from a demand standpoint. Our overall competitive positioning, we believe, continues to be Strong.

Speaker 2

It's indicated within our market share trends visavis where we were pre pandemic, and so we're encouraged by that. We continue to have resources, we believe, to continue investing in our company appropriately In positioning our agenda with the necessary resources to accomplish our objectives. And so from our standpoint, Economies remain strong across our portfolio, and we believe that supports some of the payer mix trends that we've seen. So we're reasonably optimistic here that the overall top line

Operator

Our next question comes from A. J. Rice with UBS. Your line is open.

Speaker 6

Hi, everybody. Obviously, as you went through strong results, obviously, the focus on this professional fee challenge. I know coming out of the Q2, you were, I think, thinking it would step down in Q3 and Q4. And now it sounds like if anything, it probably stepped up a little bit. I'm trying to understand what was the variance in the quarter relative to previous expectations?

Speaker 6

Was it $50,000,000 It sounds like even in the quarter there's some catch up from Q2, so maybe it's a significantly bigger number It's negative. And then is the right way to think about Q4 and into next year, a $50,000,000 quarterly run rate that you're assuming this Continues and therefore you've got to pick up in 2024, one more $50,000,000 adverse comparison. Hopefully, That makes sense. And if I could squeeze in just thinking about this quarter, the DPP payment from Florida, was that In line with what you thought or was that the net benefit a little better?

Speaker 3

Yes. A. J, this is Bill. Let me try to take those. Talk about Velasco first and isolate that from our pro fees.

Speaker 3

I would tell you our professional fee expense to non Velasco It's coming in kind of what we expected. I mean, as I said, our rate of growth in the 3rd quarter slowed from the rate of growth from the 2nd quarter. Although we continue to see subsidy requests and we've got efforts to mitigate those. There's no doubt the issue for us in the quarter was the Velasco operations as I mentioned. We're not clearing as much revenue that we anticipated.

Speaker 3

And I think it's best you have to look at that on a year to date basis As we did make some revisions as we started to see claims being paid in the Q3. And we believe, as I mentioned, it's Probably about $50,000,000 a quarter run rate for Velasco. We have a number of efforts underway To mitigate this that I spoke of as well, but in the short run that's what we're sizing it at. And you're right, when you look at next year, we'll have 3 quarters of it this year versus For next year, but we'll give you more of our thinking when we talk about 24 later on, but you've sized it about right.

Speaker 2

Anything on the Florida DPP? The Florida DPP was slightly above what we expected, but we had other programs, A. J, that We're less than we expected. So you got to look at it in the overall context of the revenue mix of the company. And I don't think it's that discrete Necessarily to just focus on one element of it.

Speaker 2

So, but it was slightly above.

Speaker 6

Okay. All right. Thanks so much.

Operator

Our next question comes from Ben Hendricks with RBC Capital Markets. Your line is open.

Speaker 7

Thank you

Speaker 8

very much. Excluding Florida DPP from both quarters, EBITDA margin appears to have declined by about 180 basis points year over year suggesting Close to $300,000,000 total headwind. If Velasco is $100,000,000 of that, how would you characterize the remaining $200,000,000 or so that brings us short of the 3Q 2022 margin, you mentioned the higher subsidy requests and maybe PPP in other quarters or in other regions other than Florida, but is there anything else Call out there that would weigh on margin? Thanks.

Speaker 3

Yes. Ben, this is Bill. Isolate the margin really that other operating line is where you see we've lost some margin On the as reported quarter, Velasco was about 50 basis points of that when you adjust for Velasco. Kind of the pro fee growth was about 40 basis And the balance was really due to the increase of the supplemental expenses that we recorded in the quarter relative to Florida DPP and other programs. The way I think about it, if you exclude Velasco, other operating was off about 120 basis points, 40 to 50 was the pro fee effect and the balance was just the increase of the supplemental expenses that we recognized in the quarter.

Speaker 3

Labor was strong. What I talked about is supply cost of strength. So it's really isolated to those two issues, the Balesco And supplemental payments as much as anything.

Speaker 2

I think Bill just to add a point to that, our same facility operating margins, Which did include those elements Bill spoke to were actually in line with our internal expectations. So I think From the standpoint of a little bit of pressure, we anticipated some pressure, but it was reflected again in the overall performance of our same facility. So The most of this lands on the Velasco challenge with respect to the revenue and the earnings associated with that venture.

Speaker 7

Thank

Speaker 3

you.

Operator

Our next question is from Gary Taylor with TD Cowen. Your line is open.

Speaker 9

Hi, good morning. One question and one clarification. Just on a clarification, I think we'll see this in the Q, but I think professional fees were 22% of other OpEx in the 1Q, 24% in the 2Q. Just wondering what that number was for the Q3 sounds like it maybe slowed a little bit or didn't change a lot. And then my real question really was about Hitting into 24, I mean, we see a lot of volume strength.

Speaker 9

I mean, if we look at the stat comps, Year to year, admissions, adjusted admissions, ER, all accelerated pretty nicely. I'm Wondering how you're thinking about carrying that volume strength into 2024 and presumably the guidance you'll give us In a few weeks at Investor Day.

Speaker 2

Well, Gary, this is Sam. And Bill can jump into your We believe again that our core business, our hospital centric core business is performing Well, I mean, our volumes were broad based. Every division in our company had admission growth, Had adjusted admission growth, every service category in our business offerings had growth except for OB. Our obstetrics volumes mainly births were down slightly, pediatric was down slightly and our behavioral was down because we made Some capacity adjustments, not because demand is shrinking in behavioral, just because we needed capacity that we felt might be more productive. So across Geography and across service lines really solid performance.

Speaker 2

On the labor front, we were Investing in the quarter in our labor agenda at the same time is making improvements. And what I mean by that, we have invested heavily in new graduate Training programs, we've done that throughout the year. That actually created a little bit of a headwind in the quarter and throughout the year for us. We think that will help us as we push into the Q4 and on into 'twenty four with making adjustments to our labor agenda. We've invested in our Galen College of Nursing Facilities as well as our other clinical education.

Speaker 2

So we're investing in our agenda For the long term prospects that all of these initiatives represent, Bill spoke to the revenue yield. I think the revenue yield from Acuity, Payer mix and pricing is positive. So I mentioned that our same stores results were in line with our expectation. I think the second thing that's important here, Gary, is that we pride ourselves on making adjustments We have a variance and I am confident in our teams. I'm confident in who we are as an organization and we've proven it over time that we can make adjustments And find solutions to really complex problems.

Speaker 2

And so we've got one. It's not what we anticipated. But again, we had the necessary requirements to consolidate a business that was Struggling and somewhat distressed, but very important to our offerings in the community. So I think as we work through it, as we gain a better understanding of it, We will be able to make adjustments and get the proper reimbursement we need from the payers for the services that we're now providing. And so, fortunately, our balance sheet remains strong, as Bill alluded to, and our ability to invest in our agenda To maintain our positioning and execute on our agenda remains strong.

Speaker 2

So when I pull up and provide some context here, I'm encouraged by what I see in the quarter and for the year and what that portends for the company as we push into the future.

Speaker 3

And Gary, this is Bill. On your clarification, pro fees as a percent of other operating was just under 24% in Q3, similar to what it was in Q2.

Speaker 9

Thank you.

Operator

Our next question comes from Ann Hynes with Mizuho. Your line is open.

Speaker 10

Hi, good morning. I know you don't want to provide 2024 guidance now, but is there any major headwinds and And to that degree, I know Nevada is introducing a UPL program. Do you have any sense What that incremental benefit will be next year? Thanks.

Speaker 3

Ann, this is Bill. The only one we'll Call out, as I mentioned in my comments, is the payer settlement we recorded in the Q1. Other than that, we'll give you our full commentary later on 2024. And on the block, it's still too early. We're waiting for the approval level.

Speaker 3

And when we discuss 2024, we'll update you on what our thinking is and the

Speaker 10

Our

Operator

next question It comes from Whit Mayo with Leerink Partners. Your line is open.

Speaker 11

Hey, thanks. Good morning. Sam, can you maybe just go back and elaborate on The ER revitalization program, how Velasco plays into that and exactly where you are in the evolution of that Graham, any tangible progress that you expect to see in 2024? Thanks.

Speaker 2

So our ER revitalization program was initiated maybe a year ago, 9 months ago with I don't remember the exact point. We determined that a couple of things. 1, demand for emergency room services continues to be Robust. It was actually more resilient coming out of the pandemic than we had anticipated. So we felt we needed to reenergize Our operations because we have had some turnover in our leadership and we had business opportunity associated with demand.

Speaker 2

So our teams came together and went about sort of revitalizing for lack of a better term Our basic operations with respect to our emergency rooms, we have proven standards and processes over time that we think Create a really good experience and a positive outcome for our patients. And so we wanted to retrain a number of our New leaders, including some of our physician leaders through Velexco and others into these standards and these processes And the early results of our program are really positive. Our patient satisfaction is up 4 or 5 points from when we began the program. Our throughput continues to improve. I think we're seeing an ER patient within 9 or 10 minutes With the clinician, as soon as they present to our door, our throughput times with respect to discharging Our patience has improved as well as those who get admitted, we're able to get them onto the floors more efficiently than we were before.

Speaker 2

We continue to believe we have opportunities to strengthen that program and so we're expanding the reach of our training. Again, that will include our physician leadership both in Velexco as well as other hospital provider contractors that we have. And we think this will play in well with into our investments that we're making into our emergency room platform, both Hospital based as well as our freestanding emergency rooms, which continue to perform at an even higher level. So all of that to say is it's yielded Volume growth, it's yielded patient throughput improvement and most importantly, it's yielded patient satisfaction

Operator

Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

Speaker 12

Hey, good morning, guys. Sam, it seems like you have an idea of what needs to

Speaker 9

be done in Velasquez. But

Speaker 12

maybe going down to the nuts and bolts of it, As we think about the fact that you employ these docs now, it sounds like there's more of a revenue issue. So is that just a matter of Tacking them on to the HCA contract or what needs to be done there? And maybe just for Bill kind of related to this, if you can give us the Contribution of Velasco II revenue per same store admin? Thanks.

Speaker 2

Let me speak to how we're approaching it. Again, We're learning as we go. I forgot the I think it was like 5,000 physicians across how many programs, 200 different programs, A really large scale business that again we felt we were at a point where we had to make a decision And I am comfortable that we made the right decision for the company long term. So as we learn more and more about this business, we think There are going to be opportunities on how we allocate the staffing underneath this business. Obviously, our emergency rooms are 20 fourseven, three Steve, Bob, we won't necessarily change the staffing per se, but there could be complementary approaches to that.

Speaker 2

There are overhead opportunities we think over time We will be able to get to but you're right, ultimately, we will need to get paid for these services appropriately. We do have some contracts today. We feel like those will have to be adjusted in the future and we are Confident that we can achieve appropriate reimbursement underneath these programs and get us to where it's an appropriate Service that's reimbursed reasonably as we get through it. But that's just not happening immediately and that's part of the challenge. And Again, we need anesthesiologists, we need emergency room physicians, we need hospitals in order to deliver the volume and maintain And so that rationale went into our decision making.

Speaker 2

And so now we have to rationalize the operations and I think those are the areas that we're going to focus on and we believe in a reasonable period of time we'll make progress on that.

Speaker 3

Brian, to your revenue numbers, Velasco revenue is just under $400,000,000 year to date and about $380,000,000 on a year to date basis.

Operator

Our next question comes from Stephen Baxter with Wells Fargo, your line is open.

Speaker 13

Yes, hi. Thanks. I appreciate all the commentary on Professional fees and the growth slowing in the 3rd quarter some. It does still seem like a pretty challenging environment out there for those firms. And As we do some checks here in anesthesia, in particular, remains a pressure point.

Speaker 13

Is this something that you think you can manage closer to flat going forward? Or is this just becoming part of the new norm around You'll need to offset as you think about the puts and takes for 2024? Thank you.

Speaker 3

Well, It's hard to call. We do believe the rate of growth is too slow going forward compared to what we've seen this year. As I said, we're working diligently On multiple work efforts, not only in the Glasgow, but working with our contracted providers as well. So again, I think we'll see slowing growth. We think we've dealt with some of the more acute issues out there.

Speaker 3

But the subsidy requests are still there, but we're managing through it and we'll continue to Yes. As we continue to go on, we'll update you on our progress, but we're working diligently to affect and slow that rate of growth and its impact on us.

Speaker 2

I think Bill alluded to this in his commentary earlier about The pressures we saw with contract labor, nurse shortages, capacity management and so forth. And I would Submit that we've worked our way through that reasonably well and we still believe there are opportunities for us to make strides forward on that agenda. We're going to learn from that how we manage that, it timely, aggressively And responsibly and I think apply those same learnings to the situation we have here and get to an answer That makes sense for the company. And so I'm confident, as I said, that we have the mindset and the wherewithal to work through these And get us to a reasonable solution.

Operator

Our next question comes from Pito Chickering with Deutsche Bank. Your line is open.

Speaker 14

Hey, good morning, guys. There are a lot of moving parts in the margin this quarter, but if you normalize for the Florida DTP and the $50,000,000 from prior period in Balesco, And look at the implied 4th quarter margin ramp, it looks higher than normal sequential margin improvement

Speaker 5

from the 4th quarter. So can

Speaker 14

you help bridge us or what are the key drivers to get to that Implied guidance for margin for 4Q?

Speaker 3

Yes. Historically, our 4th quarter is our Best margin performance quarter. Obviously, this quarter was impacted a little higher than normal because The Velasco 80 basis points I talked about and the Florida DPP, our same facility margins were over 20%. So We think our guidance is reasonable based on our outlook right now, but I think it's a combination of maybe not having some of The immediate pressures we had this quarter and then the expectation that the 4th quarter tends to trend stronger than our average.

Operator

Our next question comes from Carl Sturniak with JPMorgan. Your line is open.

Speaker 15

Thanks Just wanted to go back to Velasco for a second. So is the expectation that the $50,000,000 loss per quarter Persist this level throughout next year or would you expect to end the year at a slightly lower run rate? And then just on the mitigation levers, I mean, obviously, it sounds like Reimbursement is probably the bigger component here, but is there any way to give a sense for magnitude of the cost side? I'm just wondering if you could give some Color on what those levers are and just how much of that $50,000,000 you think it offset purely just with cost reductions?

Speaker 3

Yes. I mean, so right now, as I said, it's probably $50,000,000 a quarter, but we're working diligently to mitigate that. And as we go through The next couple of quarters and into 'twenty four, we'll continue to update on our progress on that. We view the primary issue as revenue shortfalls That's what we're working through. There may be some cost adjustments we can make, but I think it's primarily a revenue approach that we're going to take To try to turn the results around.

Speaker 3

And I just have to put, it's $50,000,000 a quarter and we have confidence That we've dealt with similar issues in the past and we'll work through that. But it's primarily a revenue challenge that we'll get through. I didn't mention earlier, but with our increased position, we now manage the revenue cycle all the way through. So I think that puts us functions from contracting to coding to billing and collections. And so we think we're in a reasonably good position to be able to at least assess those trends and then

Operator

Our next question comes from Jason Casorla with Citigroup. Your line is open.

Speaker 5

Great. Thanks. I guess with surgeries up about 1% in the quarter, a little bit better on the inpatient side, Wanted to ask about trends within service lines and the comp was a little bit difficult this quarter, but anything to call out there? And then Sam, it sounds like from your comments, you're not seeing any impact from GLP-1, so you don't expect much there. But just making sure we caught that right and if you have any other thoughts on potential Impacts to underlying demand or trends in the line will be helpful.

Speaker 5

Thanks.

Speaker 2

Yes. Let me start with the GLP issue. We think it's way too early Make any judgments about the effects on our business generally. I think the second point that I would make related to GLP, One is the fact that we have a very diversified mix of revenues as a company. I mean, obviously, we've gone through Total joints going from inpatient to outpatient.

Speaker 2

We've seen other drugs come into the mix, statins as an example with cardiology. We're actually doing more cardiology procedures in the company now than we've ever done in the history of the company. So I don't really know how to judge the implications. Bariatric surgeries in our company is a really small program, less than 0.5% of overall revenue. Obviously, we have patients who do have diabetes, but some of those patients aren't going to lose it necessarily immediately either.

Speaker 2

So it's way too early to make judgments, we believe around that. When you look at the mix of business again, as I said earlier, We had very broad based service line performance that was solid. Very few service categories We actually had a calendar headwind in the quarter with respect to surgical days and cardiology procedure days, Where we had one less surgical day in the quarter than we did last year. So our performance in the face of that headwind was strong as well. So that's what I would say, it was similar on the inpatient and outpatient as far as the mix Of service volume growth and so forth, so very consistent, Very broad based again across our geography, and so we're pretty pleased with the outputs.

Operator

Our next question comes from Scott Fidel with Stephens. Your line is open.

Speaker 16

Hi, thanks. I was hoping you could maybe talk about some of these recent developments in the environment As it relates to the potential indicators around future wage trends and in particular thinking about Some of the union actions that we've been seeing and some of these minimum wage laws that are getting passed at the state level such as in California. Just curious on sort of whether you see these in aggregate potentially creating some more pro inflationary pressure on wages or Do you think that there may be a bit over sort of focused on and won't affect the overall trajectory

Speaker 7

of the wage environment? Thanks.

Speaker 2

The market for labor has normalized in very Material ways compared to where it was a year to year and a half ago. And we're seeing it in our cost per hour as a company, which It's really lined up with the expectations we had for the year and we've seen stabilization across the elements of our Compensation programs and so forth. There are some minimum wage laws out in California that has a very de minimis impact on our company. Most of our compensation was already in line with that. We have very few issues with that.

Speaker 2

Unionization across the country beyond the healthcare industry is an issue as everybody understands, But we have been successful in pushing through those issues organizationally And have landed in a spot that we think is not going to put too much pressure on our business in the near term. And so that's where we are. Obviously, the markets change. They're dynamic and we have to adjust to those. But we're seeing positive signs with respect to turnover, with respect to hiring And even the number of new students who are populating our Galen College of Nursing programs is very encouraging, Suggesting that there's a sufficient pipeline of new nurses who want to be educated and go into The workforce, so we're pretty encouraged by the macros that we're seeing.

Speaker 2

There are obviously issues that we have to pay attention to, and we are, But we're reasonably encouraged with our overall agenda as it relates to our people and the efforts that we have in place.

Operator

Our next question comes from Jamie Purce with Goldman Sachs. Your line is open.

Speaker 7

Hey, thank you. Good morning. Just a bigger picture question for you guys. You've talked about longer term margins, 19% to 20% being a fairly sustainable range for you. A lot of moving parts right now.

Speaker 7

So just at a high level, is there anything you see in the business right now that can take you off That trajectory more permanently and just your level of confidence in getting back to that margin rate and sustain it going forward? Thank you.

Speaker 3

Yes, I mean, this is Bill. I think we have a reasonably long track record of producing margins that are in a pretty tight range. Even as we've dealt with periodic cost pressures, whether it be contract labor before or maybe bad debts in the previous cycle For physician costs now, so I think as a team, we have confidence we can continue to operate the company at reasonably strong efficiency levels. We've spoken in the past. We have a number of initiatives around technology and innovation on resiliency programs that Continue to target the opportunities to operate even more efficiently in the future.

Speaker 3

I think our historical performance is a reasonable expectation for us and we've got opportunity to continue To drive efficiency through the organization.

Operator

Our next question comes from John Ransom with Raymond James. Your line is open.

Speaker 14

Hey, good morning. If I take your $380,000,000 of Balesco, I think you did a little over $220,000,000 in 2Q. So that means the revenue dropped sequentially by like $60,000,000 I know you're talking about this as a revenue problem, but And your guidance going forward, maybe you could clarify kind of your revenue and cost outlook to get to that minus 50. And again, why was this such a I know seasonality, but why was such a steep Ramp in 3Q or decline in 3Q on revenue unless I'm doing the numbers wrong. Thanks.

Speaker 3

Yes. John alluded this in my comments. We did make some revisions to our revenue estimates in the Q3. In the Q2, I'm still new. We were putting Providers on new contracts billing, we have not received a lot of claims being paid as claims started to be adjudicated and paid.

Speaker 3

So I think it's better to look at that on a year to date basis on there. It's roughly $200,000,000 a quarter somewhere around that neighborhood is kind of what we think the model will be going forward and kind of Again, I may fall on either side of that, but I think it's best to look at the year to date. We understand the Q3 drop, but it's really just because we had no history On there and as claims started to be paid, we were able to revise that. So that's why it's $100,000,000 EBITDA for the quarter, it was about the same year today. And kind of ties into our $50,000,000 going forward.

Speaker 9

So it's $200,000,000 revenue,

Speaker 14

dollars 250,000 cost business is what's embedded in your guide going forward,

Operator

Our next question comes from Justin Lake with Wolfe Research. Your line is open.

Speaker 17

Thanks. Good morning. I'm going to pile on with this physician stuff. So just I've never seen a business kind of be off This far from like you guys are obviously very, very good at what you do. I know this is a new business, but to be $50,000,000 of revenue on A $250,000,000 baseline, 20%.

Speaker 17

So I just the like can you triple click on that for me and just say like What did you think was going on versus what is? And then the for when you gave your headwinds tailwinds for next year, the only When you talked about was that payment, which makes sense. But you've given some numbers around the subsidy costs, right, the physician costs that And they do seem like they've been a pretty big drag on margins. My estimate is somewhere around $300,000,000 give or take year over year Versus kind of revenue growth, are you assuming that that's not going to grow at anywhere close to that pace next year or do you think you could like and therefore it's not Another $300,000,000 headwind next year or are you just assuming that we can offset it? And so we kind of grow normally ex 145?

Speaker 17

Thanks.

Speaker 3

All right, Justin. Well, a couple of things. 1, literally talk about 2024. We'll give you our 2024 guidance assumptions, Some of that on the Investor Day and more details as we go through the planning on there. But as I said, we are expecting the prophy Growth rate trends to lower going forward, and we're working diligently to make that happen.

Speaker 3

On your Opening question around Velasco, I'll just emphasize what Sam said. This was a very complex and large integration Of 200 programs, 5,000 providers that happened very quickly. And we were operating maybe on some incomplete historical data. And as we started to see claims being paid, the revenue is just clearing at lower rates than we anticipated. And again, I think we've got a number of initiatives to try to offset that.

Speaker 3

And so we're working on both of those. But so that's how I would address the Velasco shortfall Right now and then we're continuing to work on the pro fee and do expect that growth rate to decline going forward.

Operator

Our next question comes from Sarah James with Cantor Fitzgerald. Your line is open.

Speaker 18

Thank you. So when I look at the moving pieces in the guidance Revision and the change in the Velasco revenue, it looks like you guys are implying core is doing a little bit better, especially if I use midpoint. So can you give us An update on what you're seeing so far, the 1st couple of months into 4Q volumes and how we should think about What 2023 guidance implies for the volume transition from 3Q to 4Q?

Speaker 3

Yes. As you know, we don't comment on the current quarter. We've made, I think, several comments on the core business trends we're seeing With really strong volume, reasonable pricing, the core operating expenses of the company are doing well in labor and supplies. I think as a broad brush, it would be our expectation those trends generally continue going forward. We don't see anything from a macro perspective changing that.

Speaker 3

But again, too early and we're not commenting on kind of intra quarter or early quarter activities. But as I said and Sam mentioned in his comments, we're pleased with the core Fundamentals that we're seeing, good demand in the market, we're positioned very well and our same facility operations is going pretty well. Unfortunately, we are dealing with the Velasco integrations and we'll overcome that. But I think you could reasonably Expect that our core trends that we've seen here today should, for the most part, continue at a reasonable pace.

Operator

Thank you. Our next question comes from Joshua Raskin with Nephron Research. Your line is open.

Speaker 7

Hi, thanks. I hate to beat this dead horse, but just on the reduction in revenues on Velasco as the Claims were getting processed. I'm just curious what was causing that reduction in revenue? Was that a lower rate issue? Was that Payer mix, was that reduction in codes submitted versus paid or was that just less services?

Speaker 7

And then I know there's been some challenges to the No Surprise Act underway. I know the Process just started back up again. Is any of that going to mitigate any of the impact there?

Speaker 3

Yes. So it's hard to attribute the shortfall in any one area. As I said, we were operating on maybe some Please historical data as our model is and probably an array of other issues that potential other hospital providers are experiencing. And so, yes, we've got a number of initiatives that we're going to try to address that we've talked about. We can continue to see we prefer to be in network providers to avoid the out of The surprise billing and that IDR process.

Speaker 3

And so we're working with our payers diligently to be in network and to get reasonable rates

Operator

Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

Speaker 1

Breanna, I think we're done. If you want to close the queue.

Operator

Thank you. Seeing no further questions, I will now turn the call back over to Frank Morgan for closing remarks.

Speaker 1

Breanna, Thank you so much for your help today and thanks to everyone for joining on the call. I'm around this afternoon and I can answer any additional questions you might have. Have a great day.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
HCA Healthcare Q3 2023
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