HCA Healthcare Q2 2023 Earnings Report

HCA Healthcare EPS Results

• Actual EPS: $4.29
• Consensus EPS: $4.28
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $4.21

HCA Healthcare Revenue Results

• Actual Revenue: $15.86 billion
• Expected Revenue: $15.63 billion
• Beat/Miss: Beat by +$229.38 million
• YoY Revenue Growth: +7.00%

HCA Healthcare Announcement Details

• Quarter: Q2 2023
• Date: 7/27/2023
• Time: Before Market Opens
• Conference Call Date: Thursday, July 27, 2023
• Conference Call Time: 10:00AM ET

HCA Healthcare (NYSE:HCA) is a for‑profit operator of healthcare facilities headquartered in Nashville, Tennessee. Founded in 1968, the company owns and operates a network of hospitals and related healthcare facilities and has grown through organic expansion and acquisitions to become a large provider of inpatient and outpatient services.

The company's core activities include the operation of acute care hospitals, freestanding surgical and emergency centers, and outpatient clinics. HCA's services encompass inpatient care, surgical services, emergency medicine, diagnostic imaging and laboratory testing, and various outpatient and ambulatory care offerings. The organization also supports physician practices and provides management and administrative services to its clinical operations.

HCA Healthcare serves patients primarily across the United States and maintains a presence in the United Kingdom through its international operations. The company participates in clinical education and training programs, and it invests in health information technology, quality improvement initiatives and care coordination to support clinical outcomes and operational efficiency.

Headquartered in Nashville, HCA is led by senior management focused on integrating clinical care with operational and technological capabilities. The company's strategy emphasizes delivering a broad continuum of care across inpatient and outpatient settings while pursuing partnerships and initiatives that support clinical quality, access and cost management.

HCA Healthcare Q2 2023 Earnings Call Transcript

Key Takeaways

• Q2 diluted EPS rose to $4.29 year-over-year and full-year guidance was raised for revenues ($63.25–64.75B), adjusted EBITDA ($12.3–12.8B), and EPS ($17.70–18.90).
• Same-facility volumes were strong, with admissions up 2.2%, inpatient surgeries up 1.8%, equivalent admissions up 3.7% and total revenue growth of 6.3% year-over-year.
• Key labor metrics improved as annualized nurse turnover declined to 17%, nurse hiring increased 9% year-over-year, and contract labor costs fell 20% versus Q2 2022.
• A patient data breach exposed basic patient information from an external email repository, prompting class actions, although no clinical or sensitive personal data was affected.
• Net revenue rose 7% to $15.86B with a 19.3% adjusted EBITDA margin, operating cash flow grew to $2.48B, leverage remained at the low end of 3–4x, and $915M was returned via share repurchases.

Presentation

[Operator]

Welcome to the HCA Healthcare Second 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.

[Frank Morgan, VP of Investor Relations at HCA Healthcare]

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

[Frank Morgan, VP of Investor Relations at HCA Healthcare]

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.

[Sam Hazen, CEO at HCA Healthcare]

Good morning. Thank you for joining the call. The company produced solid earnings in the second quarter. These results reflected continued strong demand for our services and healthy operating margins. Across most areas of our business, we maintained the operational momentum that we experienced over the past three quarters. We believe this strength should continue into the second half of the year. Accordingly, we updated our earnings guidance for 2023 to reflect this outlook. Against a difficult comparison to the second quarter of 2022, diluted earnings per share increased to $4.29. Same-facility volumes across the company were strong. Admissions grew 2.2% year-over-year, inpatient surgeries increased 1.8%, same-facility equivalent admissions increased 3.7%.

[Sam Hazen, CEO at HCA Healthcare]

This growth was driven by emergency room visits, which grew 3.7%, and outpatient surgeries, which grew 3.3%. Other outpatient categories also grew, including outpatient cardiology procedures, which increased 5%. The growth in volumes was broad-based across the company's divisions and diversified within most service lines. Additionally, volumes were supported by strong acuity growth of 1.6% and a favorable payer mix from commercial adjusted admissions growth of 5%. These factors drove an increase in same-facility revenue of 6.3% as compared to the prior year. In the quarter, we continued to invest in our people, and as a result, we saw improvements across virtually all key labor metrics. Turnover continued to decline for nurses and trended at an annualized rate of 17%.

[Sam Hazen, CEO at HCA Healthcare]

Nurse hiring remained strong in the quarter and for the year has increased by 9% as compared to last year. These positive results helped reduce contract labor costs 20% compared to the second quarter last year. During the quarter, we improved available bed capacity. Instances where we could not accept patients from other hospitals declined and represented 0.8% of total admissions, down from 1.5% in the first 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 services and provide even higher quality care to our patients. As we look to the future, we remain encouraged by both the backdrop of strong demand that we expect in our markets and our overall competitive positioning within them.

[Sam Hazen, CEO at HCA Healthcare]

HCA Healthcare will continue to use its disciplined operating culture to execute our strategic and capital allocation plans. I want to thank our colleagues for their dedication and their overall effectiveness. Let me close with this: I want to speak to a recent event that we take very seriously. On July tenth, we announced that we had recently discovered that a list of certain information with respect to some of our patients was made available by an unknown and unauthorized party on an online forum. We have confirmed that the list does not include clinical information, payment information, or other sensitive information like passwords, driver's license, or Social Security numbers. Our forensic investigation is ongoing. This event appears to be a theft from an external storage location that was exclusively used to format email messages.

[Sam Hazen, CEO at HCA Healthcare]

We are in the process of notifying all affected patients in accordance with our legal and regulatory obligations. Not unexpectedly, we have been named as a defendant in multiple class action lawsuits. This incident has not caused any disruption to our day-to-day operations, nor do we believe it will materially impact our business or financial results. HCA Healthcare believes the privacy of its patients is a vital part of its mission and remains committed to maintaining the security of their personal information. With that, I will turn the call to Bill for more details on the quarter's results.

[Bill Rutherford, CFO at HCA Healthcare]

Great. Thank you, Sam. Good morning, everyone. I will provide some additional comments on our performance for the quarter. Consolidated net revenue increased 7% to $15.86 billion from $14.82 billion in the prior year period. This was driven by 4% growth in equivalent admissions and 2.9% increase in revenue per equivalent admission. We remain pleased with our team's management of operating costs, even with the backdrop of inflation. Our consolidated adjusted EBITDA margin was 19.3% in the quarter. During the quarter, we completed our transaction to acquire a majority stake in the Valesco Joint Venture, and we are now consolidating the operations of this venture. This reduced our consolidated margins approximately 30 basis points in the quarter.

[Bill Rutherford, CFO at HCA Healthcare]

We believe this transaction not only mitigates business risk with the Envision bankruptcy proceedings, but will also further support alignment between our hospital-based physicians and our hospital care teams on improving quality, patient satisfaction, and efficiencies. When you consider this transaction and the $145 million payer settlement we recognized last quarter, our adjusted EBITDA margins have remained consistent between the first and second quarters. Let me speak to some cash flow and capital allocation metrics as they remain a key part of our long-term growth and value creation strategies. Our cash flow from operations increased $845 million in the quarter, from $1.63 billion in the prior year to $2.475 billion this year. Capital spending was just over $1.2 billion.

[Bill Rutherford, CFO at HCA Healthcare]

We paid $164 million in dividends and repurchased $915 million of our stock during the quarter. Our debt to adjusted EBITDA leverage ratio remains near the low end of our stated leverage range of 3x to 4x. As noted in our release this morning, we are updating our full-year 2023 guidance as follows: We expect revenues to range between $63.25 billion and $64.75 billion. We expect net income attributable to HCA Healthcare to range between $4.9 billion and $5.255 billion. We expect full-year adjusted EBITDA to range between $12.3 billion and $12.8 billion. We expect full-year diluted earnings per share to range between $17.70 and $18.90.

[Bill Rutherford, CFO at HCA Healthcare]

We expect capital spending to approximate $4.7 billion during the year. With that, I'll turn the call over to Frank and open it up for Q&A.

[Frank Morgan, VP of Investor Relations at HCA Healthcare]

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

[Operator]

In order to ask a question, please press Star, then the number one on your telephone keypad. Your first question comes from A.J. Rice with Credit Suisse.

[A.J. Rice, Managing Director of Equity Research at Credit Suisse]

Hi, everybody. Maybe just, I know, Sam, in his prepared remarks, said that performance was solid across divisions. I wondered, there's been some discussion this quarter about, you know, Florida and Texas had come back early and had enjoyed strong volume. Now the rest of the country's rebounding. I wonder if you'd comment on that. There was also discussion from some of the managed care guys about particularly seeing strength in Medicare, Medicare Advantage, and some pent-up demand being unleashed there. I wondered if you would comment on whether you're seeing any of that as well.

[Sam Hazen, CEO at HCA Healthcare]

All right. Thank you, A.J. As I mentioned in my comments, our volume growth was broad-based across our divisions. I think we had 13 out of 16 divisions in the company that had admission growth and adjusted admission growth. We clearly have some divisions that don't perform the same pretty much every quarter, but it was fairly broad-based across top-line metrics, admissions, adjusted admissions, payer mix improvements, and so forth. A fairly consistent performance. We did have a couple of divisions that struggled, but one was isolated in Florida, the other one was isolated more out west in the Midwest. For the most part, we were really pleased with the overall performance that we had across the geographies of the company.

[Sam Hazen, CEO at HCA Healthcare]

It's interesting, I was looking at something yesterday. We have, from an admission standpoint, almost 72% of our hospitals have greater than 2% admission growth for the year, and this includes a little bit of pressure from COVID in the first part of the year from a comparison standpoint. We have very significant performance from a surgery standpoint as well, where almost 50% of our hospitals have inpatient surgery growth above 2%. Really consistent portfolio performance that speaks to the strength of our markets, I think the competitive positioning of our facilities, and then the ongoing network development and physician development that we have as part of our core strategy.

[A.J. Rice, Managing Director of Equity Research at Credit Suisse]

Okay. All right. Thanks a lot.

[Operator]

The next question comes from the line of Ben Hendrix with RBC Capital Markets.

[Ben Hendrix, VP at RBC Capital Markets]

Hi, thank you. with regard to your updated guidance, can you provide some more color on what you're assuming for SWB supplies and other operating expense, particularly professional fees, through the second half versus what you've seen thus far this year? Anything to call out that would alter typical cadence through the second half? Thanks.

[Bill Rutherford, CFO at HCA Healthcare]

Yeah, Ben, this is Bill. Let me start. You know, I think our updated guidance reflection of what we're reserving, observing in the market in our year-to-date performance, which continues in the growth opportunities. I think net-net, when I think about the margin profile of the company between the first half and the second half of the year, we'd expect the margin profile to be slightly better in the second half of the year.

[Bill Rutherford, CFO at HCA Healthcare]

I think our salary, wages, and benefits as a percent of revenue will run mostly where they're running year-to-date. Same with supplies. We have seen a little pressure on the professional fees, and we don't think that same pressure will exist in the balance of the year, but we'll be able to manage through that.

[Ben Hendrix, VP at RBC Capital Markets]

Thank you.

[Operator]

The next question comes from Whit Mayo with Leerink Partners.

[Whit Mayo, Senior Managing Director and Senior Research Analyst at Leerink Partners]

Hey, thanks. Good morning. Maybe just a question around labor. I think I heard you say, Bill, that contract labor improved maybe 20% year-over-year. Did it change much throughout the quarter? Just trying to get a sense of maybe the exit rate and expectations for the second half of the year. Thanks.

[Bill Rutherford, CFO at HCA Healthcare]

Yeah, Whit, I mean, we're pleased with labor environment. We did mention our contract labor is down 20% versus the prior year. It's improved as well sequentially between the Q2 and Q1. Our hiring metrics are up, turnover is down, and I think that portends good things for us going through the balance of the year. You know, we mentioned before, our contract labor costs as a percent of our SWB was under seven, I think it was 6.8% in the quarter. Again, I think we're pleased with that, especially as we go through the summer months. Some of our hires get through kind of their orientation process, and that we get into the balance of the year, we would expect some continued improvement.

[Whit Mayo, Senior Managing Director and Senior Research Analyst at Leerink Partners]

Okay, thanks.

[Operator]

The next question comes from Gary Taylor with Cowen.

[Gary Taylor, Managing Director of Equity Research at Cowen]

Hey, good morning, guys. Thanks for taking the call. Just two quick ones for me. Bill, I might have missed it, but I know often you kind of run through some of the managed care metrics on admissions, you know, adjusted admission surgeries. Wondering if you could rattle off a few of those for us? Secondly, I just wanted to make sure I understood on the Envision joint venture. I think we were thinking that was maybe roughly $250 million of revenue, but do all the expenses lie in the SWB line? Is that where those reside, down to kind of a roughly EBITDA breakeven?

[Bill Rutherford, CFO at HCA Healthcare]

Yeah, Gary, let me start that. Some of our managed care, I think, as we mentioned, the same mentioned comments, really favorable payer mix. Our managed care admissions were up over 4% in the quarter. Adjusted admissions were 5%. I think we mentioned that in our prepared comments.

[Gary Taylor, Managing Director of Equity Research at Cowen]

Okay.

[Bill Rutherford, CFO at HCA Healthcare]

Emergency room visits, managed care were up 9.8% in the quarter, good acuity of case mix growth. Really pleased with the payer mix that we're seeing, and that showed itself in the commercial trends. Relative to the Valesco Joint Venture, your numbers are really close. About 70%-75% of the revenue is in SWB, the rest is in other operating. You're right, it's basically a break-even proposition, a little north of $220 million of revenue that we had in the quarter as we consolidated that.

[Gary Taylor, Managing Director of Equity Research at Cowen]

Great. Thank you.

[Operator]

Your next question will come from Justin Lake with Wolfe Research.

[Justin Lake, Managing Director and Senior Healthcare Services Analyst at Wolfe Research]

Thanks. Question on the pricing in the quarter. With strong acuity and strong, and strong, you know, payer mix, maybe, can you remind us, was there anything in the second quarter that I might have slipped that, you know, drove the pricing? I would have expected it to be a little bit better, given that, given those mixed items and strong commercial pricing. Then, Bill, can you just give us what you expect in the back half of the year for volumes, with that updated guidance?

[Bill Rutherford, CFO at HCA Healthcare]

Yeah.

[Justin Lake, Managing Director and Senior Healthcare Services Analyst at Wolfe Research]

Thanks.

[Bill Rutherford, CFO at HCA Healthcare]

Yeah, you know, Justin, nothing specific we'll call out. I mean, obviously, when we do year-over-year comparisons, COVID was still an impact for us. We had roughly $40 million of COVID support payments last year that we don't have this year. Our COVID admissions were 3% of total last year, roughly 1%. That's still influencing a little bit on the revenue line. On our volume projections for the balance of the year, I think we'll be largely consistent, where we've seen thus far, our year-to-date admissions, same-facility or about 3.3%. I would think for the full-year, we hover around 3% as well for the balance of the year. Our adjusted admissions year to date are 5.6%. I would think by the time we finish full-year, it's still 5%-6% adjusted admission.

[Bill Rutherford, CFO at HCA Healthcare]

I think the volume trends we would expect in the second half of the year be, you know, pretty consistent with what we've seen in the first half of the year.

[Justin Lake, Managing Director and Senior Healthcare Services Analyst at Wolfe Research]

Thanks.

[Operator]

The next question will come from Pito Chickering with Deutsche Bank.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Hey, good morning, guys. Thanks for taking my question. As I look at the implied revenue raise and EBITDA raise the back half of the year, I'm trying to understand the flow-through of how much revenue raises should flow through into EBITDA upside. How's the tracking sort of in 2023 versus your pre-COVID years?

[Bill Rutherford, CFO at HCA Healthcare]

Well, when I think about that, when I look at the raise, it's based on where we performed in, in our view. Of the position going forward. We do expect continued improvement in the labor market, as I said, I think as a percent of revenue we hold, I think the margin profile overall for the second half of the year will be slightly better than the margin profile we saw in the first half of the year. That, all in all, is contributing to the guidance raise. You know, I'll remind you, we've raised our guidance the midpoint of our even our guidance, roughly $450 million from where we turned the calendar. I think all that's reflective in our considerations right now.

[Sam Hazen, CEO at HCA Healthcare]

Yeah, Bill, let me add just a point here. I think it's a relevant point. Obviously, we've dealt with a fairly unprecedented labor market over the last three years or so, and we do believe, as Bill indicated earlier, it's moderating. We've also dealt with sort of an unprecedented hospital-based physician dynamic at a macro level. If you just take a snapshot of where we are six months into this year versus where we were pre-pandemic, when neither of these macro forces were in place, we've actually increased our margins by comparison to 2019. I think it's sort of a testament to the ability of the company to adjust operationally to dynamics and continue to move forward with our strategy. As we've mentioned before, we think our competitive positioning has improved compared to where we were pre-pandemic.

[Sam Hazen, CEO at HCA Healthcare]

Our market share has also improved during that time period. We continue to believe that the company has the wherewithal to adjust to these factors, continue to move ahead in a very positive way, and generate the results that we all want.

[Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank]

Great. Thanks so much.

[Operator]

Your next question comes from Ann Hynes with Mizuho Group.

[Ann Hynes, Senior Healthcare Services Equity Analyst and Managing Director at Mizuho Group]

Thanks. Good morning. I know it's early, but do you have any observations on how Medicaid determinations is impacting your business? I know one of your bigger states, Texas, started early. It sounds like it's been a little bit messy. Any early observations? Can you remind us if you have anything from Medicaid determinations in your guidance? Do you think this process is gonna be an overall positive or negative for HCA? Thanks.

[Bill Rutherford, CFO at HCA Healthcare]

Yeah, thanks for that. It's a good question. You're right, it is still early, and we've got, you know, a pretty organized approach to not only continue to watch the market but respond to it on there. We haven't seen any negative or any material impact on this today. We think what we're seeing, many of the patients who are receiving determination, that, you know, there are some opportunity to continue to get them re-enrolled in Medicaid. Some of them are more technical. Few, they either didn't complete an application or some other aspect of that. Our teams are trying to identify those individuals as best they can, assist them in gaining coverage.

[Bill Rutherford, CFO at HCA Healthcare]

We remain encouraged by many of the studies that the people who are being redetermined off will qualify either for coverage in an employer-sponsored plan or qualify for coverage in the Health Insurance Marketplace. We'll continue to watch that as that unfolds, but no impact right now. Nothing in our guidance is assumed for Medicaid redetermination. We believe over the long run, you know, there could be some positive trends from this, but we'll just have to wait to see how that plays out.

[Operator]

The next question comes from Kevin Fischbeck with Bank of America.

[Kevin Fischbeck, Managing Director and Senior Equity Research Analyst at Bank of America]

Great, thanks. Wanted to just maybe dig in a little bit more to kinda how you're thinking about the volume growth in the back half of the year. I guess, you know, when you think about saying trending relatively similar in the back half versus the first half, I guess the way we had been thinking about it anyway, was that last year it felt like as COVID spiked at the beginning of the year and then became less and less of an issue, that volumes just started to kinda normalize in the back half of the year. That maybe the, the comp would be a little bit more difficult, as you got into the Q4, and the growth rate might slow.

[Kevin Fischbeck, Managing Director and Senior Equity Research Analyst at Bank of America]

I just wanna think about how you're thinking about, you know, volume growth and where you are versus maybe long-term trend lines and things like that. How do you put that into context about, you know, thinking this rate of growth will continue in the back half of the year?

[Sam Hazen, CEO at HCA Healthcare]

Kevin, this is Sam. let me, let me give you sort of our the backdrop we think of what exists for us with respect to volume, and this is more of a general commentary. I'll let Bill sort of reconcile the back half of the year to the first half of the year with numbers. I'm not sure I can do that at this particular point in time. As we've said before, and we continue to believe this, we feel that within our markets, there's unique attributes that are driving solid demand for healthcare services. You know, population growth continues to be strong in Texas and Florida, in Utah, Nevada, South Carolina, pretty much Tennessee. Across the board, we're experiencing population growth within our markets.

[Sam Hazen, CEO at HCA Healthcare]

The second point is we're investing very significantly in our strategy and our positioning within these communities so that we can respond to our patient needs, put our facilities in the best position to grow, and we think that's going to help us sustain market share growth as we move forward. What we're seeing is that our overall volume assumptions are supported by acuity. Acuity has maintained some of that strategic. Some of that, I think, is the dynamics that exist within the markets. The second support mechanism that's in place, and we view this positively, is the payer mix dynamic. We have seen, throughout the first half of the year, commercial admissions outpace.

[Sam Hazen, CEO at HCA Healthcare]

our total admissions, again, we think that's reflective of a strong economy and job positioning that a lot of people have in our communities, as well as the Exchanges. We think those will continue on into the last half of this year, and we're optimistic that those will continue on into the future, at least in the near term. Bill, you can maybe try to reconcile.

[Bill Rutherford, CFO at HCA Healthcare]

Well, I'll just say, I mean, when we think about projecting going forward, we try to take all those factors into consideration, as Sam mentioned, and where we're seeing year-to-date. Mind you, when we originally set our guides, we anticipated 1%-2% admission growth, mid-single digit outpatient growth. That's still hovering around 2%-3% equivalent admission growth was our expectation. Given the fact that we're seeing north of 3% admission growth and, you know, 5.5% adjusted admission, that's informing our position next for the balance of the year. I still think around three is a good number for the full-year now, based on the first six months of the year.

[Bill Rutherford, CFO at HCA Healthcare]

We continue to see good outpatient revenue growth, and so that should support this 5%-6% equivalent admission expectation for the full-year.

[Sam Hazen, CEO at HCA Healthcare]

Bill, if I can add one thing, you know, with respect to our investments in our networks, we have, at this particular juncture, the largest pipeline of projects that are in motion, including our outpatient development components, which are very robust, as well as other inpatient and facility needs there. Our pipeline, from an organic standpoint, as far as capital, that we will see hit the market in latter 2023, 2024, early 2025, is more robust than we've seen in pretty much recent years.

[Kevin Fischbeck, Managing Director and Senior Equity Research Analyst at Bank of America]

All right, great. Thanks.

[Operator]

The next question comes from Brian Tanquilut with Jefferies.

[Brian Tanquilut, Senior Analyst of Healthcare Services, HCIT, and Digital Health Equity Research at Jefferies]

Hey, good morning, guys. Bill, you know, you touched on the impact of Envision, being a 30 basis point drag. I know there's some, you know, a lot of noise happening with American Physician Partners and just-

[Bill Rutherford, CFO at HCA Healthcare]

Yeah

[Brian Tanquilut, Senior Analyst of Healthcare Services, HCIT, and Digital Health Equity Research at Jefferies]

Stuff moving around with physician staffing. As we think about that drag, is there opportunity to bring this up, or is that, like, a more structural thing where you've had to bring in, you know, in-house capabilities for physician staffing? Thanks.

[Sam Hazen, CEO at HCA Healthcare]

Yeah, this is Sam. Let me start with that, and Bill can color in here. You know, as I mentioned, the backdrop in the hospital-based physician space has been very difficult over the past few years because of multiple factors. For us, in the short run, we have had to respond to these difficulties to maintain capacity and service availability and so forth. We did what we had to do to make sure that our business continued to move forward appropriately. For the most part, we've overcome these pressures and been able to grow, and we've increased our earnings expectations for the year in the face of some of these challenges.

[Sam Hazen, CEO at HCA Healthcare]

As Bill mentioned, we don't anticipate the same level of increases in pressures in the last half of the year, although we'll have some, but it's not gonna nearly be what we've experienced in the first part, we don't think. We do believe with the Valesco operations, we now have a platform that gives us the potential to respond better to these type of challenges and possibly integrate hospital-based physicians into our hospital operations even more effectively, producing better clinical performance, efficiency, and even growth, we think. I'll say this again, I said it earlier, you know, we have a pattern of responding to different kind of operational challenges, whatever they happen to be. We've had labor, as I mentioned, we've had physician costs. Currently, we've had uninsured in the past, and we've tended to overcome them.

[Sam Hazen, CEO at HCA Healthcare]

In the short run, sometimes they can create an individual pressure, but I think the scale of HCA, the resources that we have, and the ability to execute, allows us to move through some of these pressures over time and get where we wanna be.

[Brian Tanquilut, Senior Analyst of Healthcare Services, HCIT, and Digital Health Equity Research at Jefferies]

Thanks, Sam.

[Operator]

The next question comes from Lance Wilkes with Bernstein.

[Lance Wilkes, VP and Senior Equity Analyst at Bernstein]

Great, thanks. I've got a strategic question for you on, on digital health and AI. I was just interested in the initiatives that you're kind of putting in place through the organization at this point, where you're maybe investing on the venture capital side here. Long-term, what you see as the opportunity for this, whether it's, you know, potentially reduced compensation or an ability to expand volume across the footprint?

[Sam Hazen, CEO at HCA Healthcare]

This is Sam. We have a growing digital agenda in our company, and I am very excited about what the prospects are for us around that. We are investing in a new clinical system, which we think is going to allow us to move information to the cloud more efficiently, and as a matter of fact, move standard datasets into the cloud so that we can then use big data even more effectively and infuse that back into the care process. We will couple our digital agenda with something we are calling care transformation innovation. And inside of that, we believe we have opportunities to improve care processes, eliminate a lot of the variation that exists today in our company, create better quality, and at the same time, more efficiencies. Artificial intelligence, we believe, will play a huge part in that

[Sam Hazen, CEO at HCA Healthcare]

It's way early for us to know exactly what that will be and how that will influence our agenda, but we're encouraged about the prospects for it. We are partnering with some very sophisticated companies to help us push through this in ways that I think will accelerate our agenda and inform it with more expertise than what we have internally. We're excited about what this can yield for us as we push into our next life cycle, if you will, and we'll wait to see what artificial intelligence, in fact, can do. We view it as a positive, you know, potential for us in a very significant way.

[Lance Wilkes, VP and Senior Equity Analyst at Bernstein]

Great. Thanks.

[Operator]

The next question comes from Andrew Mok with UBS.

[Andrew Mok, Executive Director at UBS]

Hi, good morning. Just wanted to follow up on the pricing discussion, maybe from a different angle. Revenue per outpatient equivalent, looks like it was a down about 1% in the quarter, which seems to be weighing on strong inpatient pricing, up 6%. Can you help us understand the pricing and mix trends across your outpatient platform that are causing that unit revenue metric to blend down this year? Thanks.

[Bill Rutherford, CFO at HCA Healthcare]

Well, I'd say we're pleased with the outpatient growth that we're seeing. If you look at the overall outpatient growth that we have, it's, you know, our expectation was mid-single digits. We're well north of that in the quarter and on a year-to-date basis. You know, there's always a little bit of a mix issue that occurs. Our emergency room volume was up, what, 3.7%, which where a lot of your outpatient or outpatient surgical growth was up 3.3% in the quarter. I think those are really good stats. On the outpatient revenue per unit, you know, there's always a blend between surgical, emergency room, and diagnostic. I would say overall, we're very pleased with the outpatient overall growth that we are seeing.

[Sam Hazen, CEO at HCA Healthcare]

Yeah, Bill, just, you know, the second quarter overall outpatient revenue growth was actually up over the first quarter. We are seeing some acceleration. There's a lot of moving parts, as Bill just alluded to, to outpatient revenue, between physician clinics, urgent care, all the way up to outpatient cardiology procedures, which tend to be our highest reimbursed type of procedures. The mix of that can influence the outpatient. We tend to look at it in the aggregate, and for the most part, our aggregate revenue growth has been stronger in the second quarter than it was in the first quarter. Within the sort of the pricing elements, we continue to get the targeted price increases that we want in both our inpatient and our outpatient businesses.

[Sam Hazen, CEO at HCA Healthcare]

It's more to Bill's point, sort of the mix and the mixture of all of the different components in a way that has produced solid growth for us.

[Andrew Mok, Executive Director at UBS]

Great. Thank you.

[Operator]

The next question comes from Calvin Sternick with JPMorgan.

[Calvin Sternick, VP of Equity Research at JPMorgan]

Hey, good morning. I wanted to ask about the commercial rate cycle. I think last quarter, you said you guys are about two-thirds of the way through 2024 and about a quarter of the way through 2025. Can you give us an update on the progress and how those rate discussions are evolving? Thanks.

[Bill Rutherford, CFO at HCA Healthcare]

They're evolving pretty consistent. As we just mentioned, we're continuing to see rates in kind of that mid-single digit level. Far as contracted for 2024, I think we're a little north of 70% for 2024 now. I think our efforts continue. I think our relationships with our major payers continue to be strong, and we're pleased with the progress we're making in that area.

[Operator]

The next question comes from Scott Fidel with Stephens.

[Scott Fidel, Managing Director and Senior Analyst of Healthcare Services at Stephens]

Hi, thanks. Interested just as against the backdrop where the managed care payers are seeing the higher medical cost trends this year, whether you're seeing any changes in behaviors when interfacing with them from a prior authorization or utilization management type perspective, or are things pretty consistent there? Just a quick follow-up, just on the slight raise in the CapEx is that just related to the general broad-based investments that Sam just talked about, or are there any specific projects that you would cite around the update to the CapEx guide? Thanks.

[Bill Rutherford, CFO at HCA Healthcare]

Yeah, I'm gonna try to take both of those. I think, as we maybe mentioned in the past, you know, as you think about authorization and medical necessity reviews, you know, those activities have picked up again. As you know, during the COVID period of time, those had eased a little bit, but we still see a lot of friction, if you will, as you go through that effort. We work with our payers to try to resolve those appropriately, make sure that we defend our positions where necessary. But there is a level of activity that both us and the payers have to devote to try to smooth through that process, but we tend to be able to work our way through it. On the CapEx, I think it's simply reflective of the opportunities we see in the market to continue to deploy capital for growth.

[Bill Rutherford, CFO at HCA Healthcare]

Fortunately, we continue to see really strong cash flow, to be able to support that CapEx. Again, I think it's reflective of the growth opportunities we see in the market.

[Sam Hazen, CEO at HCA Healthcare]

Bill, as we mentioned on the last call, we have acquired some land for future expansion in some of these fast-growing markets that we serve, and that's put some upward pressure on our capital spending, we believe those are long-term, good decisions for us.

[Operator]

The next question comes from Jason Cassorla with Citigroup.

[Jason Cassorla, VP and Equity Research Analyst at Citigroup]

Yeah, great. Thanks for taking my question. Just wanted to ask a little bit more on the labor front. You know, thinking about all the efforts and programs you put in place, contributing to the better turnover and hiring trends, I guess, is there a way to help frame what inning you're in? As it relates to these efforts, you know, where you'd like to see some of the outputs on turnover, retention kind of move to, or any other thoughts on the labor front and the trajectories there? Thanks.

[Sam Hazen, CEO at HCA Healthcare]

Yes, this is Sam. Thank you for that question. You know, as I mentioned, we have invested very heavily in our people agenda over the past few years. We've increased our capacity within our recruiting function, and our recruiting efforts are yielding strong hiring, and we believe that will continue on into the latter half of the year. Our retention efforts with respect to responding to our employees' needs, so that they have the necessary resources and tools to be effective in their day-to-day jobs, we're getting better at that. That's helping turnover. Turnover is approaching pre-pandemic levels, especially in the nursing area. We're a few points above pre-pandemic, but if you annualize the second quarter turnover, it would suggest less than that.

[Sam Hazen, CEO at HCA Healthcare]

We're encouraged by that, and we do believe we have opportunities to continue improvement in that area. With contract labor, as Bill mentioned, we expect to see improvements as we move through the last half of the year. I'm very excited about our workforce development initiatives. We continue to invest heavily in Galen College of Nursing. They're expanding each quarter, it seems, into new markets and establishing new relationships and new opportunities for people and for our company. We're also investing in our, what we're calling our Centers for Clinical Advancement, which is our ongoing clinical education for our people, so that they can upskill their capabilities and competencies, and put them in a position to either deliver better care or grow in their own individual career. What inning are we in?

[Sam Hazen, CEO at HCA Healthcare]

You know, we're in the middle innings in some of the areas. We will wait to see how the latter half of the year plays out, but all in all, I think tremendous results. We're very competitive, we believe, across the organization with our compensation and benefit programs, as I mentioned earlier, we've been able to navigate through these difficult periods and maintain margins. I think our labor costs, again, if you just look at 2019 as a proxy, our labor costs in 2023 are below, as a percent of revenue, 2019, and again, that's in the face of a very difficult labor market.

[Jason Cassorla, VP and Equity Research Analyst at Citigroup]

Great. Thank you.

[Operator]

The next question comes from Jamie Perse with Goldman Sachs.

[Jamie Perse, Equity Research Analyst at Goldman Sachs]

Hey, thank you. Good morning. Can you comment on seasonality expectations for the third quarter? Anything beyond normal seasonality from a headwind or tailwind perspective that we should be thinking about? I think normally, revenue's down slightly and EBITDA down maybe mid-single digits to high single digits. Is that the right way to be thinking about the third quarter and anything in July that's informing that? Then I think there's an earlier question on backlog that may not have been fully answered. I'd love your thoughts on that as well. Thank you.

[Sam Hazen, CEO at HCA Healthcare]

We mentioned at the end of the fourth quarter that we were starting to see normal seasonality patterns materialize. We've seen that so far through the first half of this year. We think that will continue on into the second half of this year. The third quarter is not as strong as the fourth quarter. The fourth quarter is always the strongest quarter of the year for us, given the outpatient activity and deductibles and so forth. We think the third and fourth quarter will be similar in patterns to pre-pandemic seasonality, and that's what's reflected in our guidance.

[Operator]

The next question will come from Steven Valiquette. Your line is open.

[Steven Valiquette, Managing Director at Barclays]

Great, thanks. Good morning, everybody. I guess as a follow-up to just some of these prior questions on the labor and commercial rate updates, there was some conjecture for HCA that the company didn't have, you know, quite as many commercial payer contracts up for renewal for fiscal 2023 to capture some better rates for elevated labor costs, which you had more coming up for renewal in 2024. Now that the noise level's kind of died down, you know, somewhat here in mid-2023 on overall labor cost pressure versus, certainly versus 12, 15 months ago, I guess the question is, do you still have confidence to potentially capture, you know, potentially slightly better than average commercial rate updates for fiscal 2024, with labor pressure maybe still being the key variable within those discussions?

[Steven Valiquette, Managing Director at Barclays]

Are those going to be a little bit tougher now, given that some of the pressure has subsided? Just want to get your kind of latest thoughts around that. Thanks.

[Sam Hazen, CEO at HCA Healthcare]

Well, this is Sam. Bill indicated that we're 70% contracted on 2024 around our targeted escalation objective. Labor costs, as you mentioned, are moderating some, yes. There's still inflationary pressures underneath it, at as one would expect. Now, we have physician cost pressures with respect to pro fees, and, you know, our belief is that, you know, that will have to be paid for by someone. That will become a new factor in our thinking and our justification for appropriate price increases. Our costs, you know, are not just one category. We have multiple categories, as you can see on the income statement, and all of that factors into our considerations when we're negotiating.

[Operator]

The next question will come from Joshua Raskin with Nephron Research.

[Joshua Raskin, Research Analyst at Nephron Research]

Hi, thanks. Good morning. Were there any meaningful differences in the payer mix on the outpatient side? You know, an obvious focus on Medicare and specifically Medicare Advantage volumes. Are you seeing anything in the Medicare market that would support higher levels of demand than we saw, you know, last quarter or the quarter before? Anything that you feel like is inflecting?

[Bill Rutherford, CFO at HCA Healthcare]

Yeah, Josh, when I look at kind of the admissions versus adjusted admissions between the payer categories, they're comparable. You know, our Medicare adjusted admissions were up 5%. Our managed care adjusted admissions were up 5%, as we mentioned earlier, you know, fueled by emergency room growth. I think the trends are pretty comparable among the payer categories, and that's strengthening payer mix. That's, I think, positive trends for us. Nothing else underneath the outpatient area that I would distinguish other than we continue to see good commercial ER traffic. Our commercial outpatient was up, pushing close to 4% as well. Again, I think they're pretty comparable in terms of the general trends we're seeing.

[Sam Hazen, CEO at HCA Healthcare]

I would say, Bill, just to put a little bit of color on the outpatient. Our commercial outpatient revenue growth is clearly outpacing our Medicare outpatient revenue growth. Some of the adjusted admissions are influenced by, you know, some of the calculations, if you will, but we are seeing really solid commercial outpatient revenue growth, again, influenced by the ER, influenced by surgeries, which are represented by roughly 50%-55% commercial. Good growth there, and all of that yields, you know, solid commercial revenue growth.

[Joshua Raskin, Research Analyst at Nephron Research]

All right. Thanks.

[Operator]

There are no further questions. At this time, Mr. Frank Morgan, I turn the call back over to you.

[Frank Morgan, VP of Investor Relations at HCA Healthcare]

Bailey, thank you so much for your help today. Thanks, everyone, for joining our call. I hope you have a wonderful rest of your week, and I'm around this afternoon if we can answer any additional questions you might have. Thank you very much. Have a great day.

[Operator]

This concludes today's conference call. You may now disconnect.

Participants

Executives

• Bill Rutherford, CFO
• Frank Morgan, VP of Investor Relations
• Sam Hazen, CEO

Analysts

• A.J. Rice, Managing Director of Equity Research at Credit Suisse
• Andrew Mok, Executive Director at UBS
• Ann Hynes, Senior Healthcare Services Equity Analyst and Managing Director at Mizuho Group
• Ben Hendrix, VP at RBC Capital Markets
• Brian Tanquilut, Senior Analyst of Healthcare Services, HCIT, and Digital Health Equity Research at Jefferies
• Calvin Sternick, VP of Equity Research at JPMorgan
• Gary Taylor, Managing Director of Equity Research at Cowen
• Jamie Perse, Equity Research Analyst at Goldman Sachs
• Jason Cassorla, VP and Equity Research Analyst at Citigroup
• Joshua Raskin, Research Analyst at Nephron Research
• Justin Lake, Managing Director and Senior Healthcare Services Analyst at Wolfe Research
• Kevin Fischbeck, Managing Director and Senior Equity Research Analyst at Bank of America
• Lance Wilkes, VP and Senior Equity Analyst at Bernstein
• Pito Chickering, Director and Senior Equity Research Analyst at Deutsche Bank
• Scott Fidel, Managing Director and Senior Analyst of Healthcare Services at Stephens
• Steven Valiquette, Managing Director at Barclays
• Whit Mayo, Senior Managing Director and Senior Research Analyst at Leerink Partners