HCA Healthcare Inc (HCA) — Q2 2016 Earnings Call Transcript

Thank you, Adam and good morning to everyone. Mark Kimbrough, our Chief Investor Relations Officer, and I'd like to welcome everyone on today's call, including those of you that are listening to the webcast. And with me here this morning is our Chairman and CEO, Milton Johnson; Sam Hazen, our Chief Operating Officer; and Bill Rutherford, our CFO. Before I turn the call over to Milton, let me remind everyone that should today's call contain any forward-looking statements, they are based on management's current expectations. Numerous risks, uncertainties, and other factors may cause actual results to differ materially from those that might be expressed today. Many of these factors are listed in the press release that we issued today, and in our various SEC filings. Several other factors that will determine the company's future results are beyond the ability of the company to control or predict. In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events. On this morning's call, we may reference measures such as adjusted EBITDA and net income attributable to HCA Holdings, Inc. excluding losses or gains on sales of facilities, losses on retirement of debt, and legal claims costs, which are non-GAAP financial measures. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HCA Holdings, Inc. to adjusted EBITDA is included in the company's second quarter earnings release. As you heard, the call is being recorded. A replay will be available later today. With that, I'll turn the call over to Milton Johnson.

All right, thank you Vic and good morning everyone joining us on the call and the webcast. I hope each of you has the opportunity to review HCA's second quarter results release this morning. I made a few comments on the quarter and our thoughts on 2016 data and then turn the call over to Bill and Sam to provide more detail on the quarter's results. Net income attributable to HCA Holdings increased 29.8% to $658 million or $1.65 per diluted share, a 39.8% increase compared to $507 million or $1.18 in the prior year second quarter. As noted in our second quarter release, we recognized a $4 million tax benefit or $0.11 per diluted share related to the early adoption of the new accounting standards which reduced our provision for income taxes. Adjusted EBITDA totaled $2.052 billion, an increase of 2.2% over the prior year. We experienced volume growth in both our admissions and the business, although at a more modest growth rate compared to previous quarters. Same facility admissions increased 0.6% while same facility equivalent admissions increased 1.6%. Same facility emergency room business increased 4.1% over last year's second quarter. Inpatient and outpatient surgery volumes reflect solid growth over the second quarter last year. Total surgery cases grew 1.6% on a same facility basis. Sam will provide additional comments on our volume trends in just a moment. Once again we experienced strong growth and cash flow from operations totaling $1.349 billion compared to $1.057 billion in the prior year second quarter, an increase of 28%. With only $663 million in capital expenditures and $1.237 billion to purchase 15.506 million shares which included $750 million for repurchasing 9.613 million shares during the quarter. We have repurchased a total of 24.427 million shares in 2016 at an average price of $76.4. We had approximately $750 million remaining on our $3 billion authorization on June 30, 2016 and also during the quarter we purchased three hospitals in the Dallas Fort Worth and Austin Texas markets which we believe will broaden the strength of our market presence in the future. We expect continued growth in our inpatient and outpatient services in our markets in the years ahead. We are committing capital to meet this increase in demand. For example, we recently announced a $650 million capital commitment about our Florida facilities to expand and upgrade our patient service offerings. This includes the construction of a new facility on the campus in Melbrook Southeastern University in Florida along with several other expansion and facility upgrades within the markets. These investments will allow us to better serve our communities, respond to the growing demand for healthcare services, and provide the highest level of patient care experience. I want to take a moment to recognize a number of senior appointments we have announced over the past quarter, all of whom have been promoted from HCA. Due to retirements, we have made a few new division president appointments and announced a new Senior Vice President of Employer Engagement. These are all seasoned professionals with many years of experience in their discipline and with HCA. They know our culture, they understand our business strategy and I am extremely pleased that we have a strong bench to ensure continuity. So, congratulations to all of them. Now moving to 2016 guidance, primarily due to volume growth at the low end of our expectations during the first six months of 2016, we are revising our full year 2016 guidance expectations. As noted in this morning's earnings release, our revenue range is now estimated to be between $41 billion and $42 billion. Adjusted EBITDA is now expected to range between $8.1 billion and $8.3 billion, and our adjusted EPS range is now estimated to be between $6.40 and $6.70 per diluted share, reflecting increased net income, share repurchase, and the favorable impact of change in accounting standards to forward our tax-rate for the first six months of 2016. Our guidance for capital expenditure for 2016 remains around $2.7 billion. So, with that I will turn the call over to Bill.

Good morning everyone. I will add to those comments and provide more details on performance and our health in the quarter. As we reported in the second quarter, our same facility admissions increased 0.6% over the prior year and equivalent admissions increased 1.6%. Sam will provide more commentary on volumes in a moment. But I will give you some highlights. During the second quarter, same facility Medicare admissions and equivalent admissions increased 1.2% and 2.1% respectively. This includes both traditional and managed Medicare. Managed Medicare admissions increased 3.9% on a same facility basis and now represent 33.5% of our total Medicare admissions. Same facility self-pay and charity admissions increased 5.7% in the quarter and now represent 7.5% of the total admissions compared to 7.1% in the second quarter of last year. Year-to-date, our same facility uninsured admissions are up 7.8% compared to the same period last year. Managed care and others which include exchanged admissions declined 1.6% and equivalent admissions declined 0.8% on the same facility basis in the second quarter compared to the prior year. On a year-to-date basis, same facility managed care, other, and exchanged admissions have increased 0.9%. Same facility emergency room business increased 4.1% in the quarter compared to the prior year and same facility self-pay, charity, and ER business represented 19.4% of our total business in the quarter compared to 19.3% last year. Intensity of service or acuity increased in the quarter with our same facility case mix of 3.9% compared to the prior year period. Same facility surgeries increased 1.6% over the quarter, and same facility inpatient surgeries increased 1.8% while outpatient surgeries increased 1.5% compared to the prior year. Same facility for equivalent admissions increased 2.1%. Same facility managed care and other including exchanged revenue admissions increased 5.8% in the quarter. Same facility charity care and uninsured discounting increased $863 million in the quarter compared to the prior year. Same facility charity care discounts totaled $1.097 billion in the quarter, an increase of $207 million compared to the prior year period while same facility uninsured discounts totaled $3.085 billion, an increase of $656 million over the prior year period. Our total uncompensated care trends, which you could call bad debts, charity and uninsured discounts combined, have remained consistent over the past four quarters. Now turning to expenses, expense management in the quarter was good. Same facility operating expense for equivalent admissions increased 2.4% compared to last year second quarter. Our consolidated adjusted EBITDA margin adjusted for share-based compensation and income was 20.5% for the quarter compared to 20.7% in the second quarter of last year. Sequentially, it increased 40 basis points from the first quarter of this year. Same facility salaries for equivalent admissions increased 2.4% compared to last year second quarter. Salaries and benefits as a percentage of revenue increased 10 basis points compared to the second quarter of 2015. Same facilities supply expense for equivalent admissions increased 0.9% in the second quarter compared to the prior year period due to growth in surgical volumes, while the impact of volume growth was offset by several supply chain initiatives. This led to supply costs down for some revenues increased 20 basis points versus the prior year period. Other operating expenses as a percentage of revenue increased 30 basis points from last year's second quarter to 18.0% of revenues, primarily reflecting a year-over-year increase in our professional fees that we discussed on our first quarter call. However, other operating expenses as a percentage of revenue has remained level for the past few quarters. We recognized $5 million in electronic health record income in the quarter compared to $18 million in last year's second quarter consistent with our expectations. Let me briefly touch on cash flow. We had another strong quarter with cash flow from operations totaling $1.349 billion. Year-to-date cash flow from operations totaled $2.748 billion, representing a 32.4% increase from the prior year. Cash flow from operations benefited by $118 million on a year-to-date basis due to the adoption of accounting policies regarding excess tax benefits related to the settlement of equity. At the end of the quarter, we had approximately $1.98 billion available under our revolving credit facilities. Debt to adjusted EBITDA was 3.93 times as of June 30, 2016 compared to 3.85 times at December 31, 2015. I also want to highlight the earnings per share results. For the quarter, our diluted earnings per share before considering losses on retirement of debt, legal claim costs, and gains or losses from the same facilities increased to $1.66 per diluted share from $1.37 in the prior year period. When adjusted for the $0.11 benefit from the adoption of the new accounting policy, this represents a 13% growth over the prior year in the quarter. These strong cash flow trends, balance sheet provisions, and EPS growth results highlight an important strength of the company. Let me briefly touch on healthcare reforms. Health reform and care continues to grow in the quarter. In the second quarter, we saw approximately 13,300 same facility exchange admissions compared to 11,600 in the second quarter of last year, representing a 15% year-over-year growth. You may recall we had about 12,500 exchange admissions in the first quarter. We saw approximately 54,000 same facility exchange ER business in the second quarter compared to just under 45,000 in the second quarter of 2015 and just under 50,000 in the first quarter of 2016, so overall, these trends are tracking in line with our expectations. So that concludes my remarks and I will turn the call over to Sam for some additional comments.

Good morning, I'll start again by giving you some of the quarterly volume stats that I normally provide on these calls. Once again, the company continued to have broad-based growth across our market and various service lines that make up our business. For our domestic operations on a same facility basis, we saw 10% to 14% growth in admissions, 11% to 14% growth in adjusted admissions, and 12% to 14% growth in emergency room business. Our emergency rooms grew by 27% and accounted for approximately 50% of our overall ER growth. Hospital-based emergency room business grew 2.2%. In addition to the strong portfolio performance, the company's diversified service line was also strong. For domestic operations on a same facility basis, inpatient surgeries grew 1.7%, which increased surgical admissions to 28.6% of total in the quarter, an increase of 130 basis points. Surgical volumes were particularly strong in cardiovascular, orthopedic, and general surgery categories. Outpatient surgeries grew about 1.4%. Both components of the service line, hospital-based and our division had solid growth. Additionally, same facility outpatient endoscopic procedures grew 1.6%. Our health admissions grew 3.7%, rehab admissions grew 1.7%, cardiology procedure volumes grew approximately 2%, and trauma volumes grew 14%. Observation business was up 7.5% and finally our emerging care business on a non-same facility basis grew 11%. Two related service lines experienced declines in the quarter. Deliveries were down 1.5% in the quarter and neonatal admissions declined 2.6%. Overall average length of stay increased 0.6%, which was driven mainly by the growth in our equity index. We believe our efforts to develop a more comprehensive and complex level of services across our provider networks are driving this increase. I would also note that our inpatient market share for the year ended 2015 shows that HCA continues to gain share in total and across most of its markets. As stated earlier, our volume growth, particularly inpatient admissions, was at the lower end of our expectations. Most of this can be attributed to three areas, but before I explain them, it is important to note that the second quarter last year was very strong and presented a difficult comparison with inpatient admissions up 4.1% and adjusted admissions up 4.9%. First, growth in our emergency room business in our hospital base units slowed compared to the past few years, resulting in downstream growth in inpatient admissions through the ER not being as strong as compared to recent quarters. We believe most of the softness can be explained by three factors. First, a slowing in demand growth to more normal rates, second, new competition in several markets, and third, in a couple of our Florida markets, we have experienced changes in how certain Medicare Advantage payers classified patients between inpatient admissions and observation status. The company continues to execute a comprehensive agenda to grow our emergency room business, which we believe has strong overall demand. Secondly, growth in our behavioral and service lines saw recent wins. We believe this year's slowing growth is mostly a result of capacity constraints caused by clinical staffing and a lack of beds in a few of our behavioral units. On the rehab side of the business, the issues are not as easily categorized. We have not opened as many units this year compared to past years and are seeing modest impact in a few markets from the CMS Pharma initiative. We continue to invest in recruiting talent with service lines where we have solid growth prospects in many of our markets. Finally, women and children admissions were down due to broad-based softness and deliveries, which led to downstream declines in neonatal admissions. Some competitive issues in a few markets and a general decline in the theatric volume due to a milder respiratory season compared to last year also weighed on these numbers. These services continue to be an important part of our overall network strategy, and we believe the company is well positioned to compete effectively in these areas. All in all, the company continues to show solid top-line growth and sustained market share gain. Our growth agenda is comprehensive, well-resourced for capital spending and marketing, and we continue to execute at a high level. We believe the company has solid growth prospects across the uniquely diversified portfolio of our markets and service lines, and we believe our local provider system is well positioned to capitalize on them. With that let me turn the call back to Vic.

Thanks Sam. I don’t know if you’ve come back on, and we'll start taking questions. We would like to choose questions one at a time so everyone gets an opportunity.

Thanks, good morning. My question is on cash flow. Just really curious on how you expect cash flow from operations to trend this year and really to correlate with this question is maybe this range of free cash flow after not controlling interest and did that really change after the second quarter versus your previous expectations?

Yes, hey good morning Whit. As we look at cash flow from operations, obviously it's been very strong year-to-date. We are encouraged and anticipate that strength to continue. We have previously said cash flow from operations to be about $5.5 billion; I think we are still within that range and free cash flow being around $2.2 billion what we anticipated at this stage of the year.

Great, so no change to that?

No.

Okay, thank you.

Thanks Whit.

Hey, Whit let me just add one more. Other than the impact of the accounting change that we have talked about, we haven't projected for that for the balance of the year.

Okay, thanks.

Great, thank you. So we all knew it was going to be tough to go up against the great quarter on volume but I would like to delve into that because, you know, as volumes go so goes everything else. If I could just recap and ask the questions. First, I think what we are seeing here is no growth across the broad range of types of admissions and payer types but softer than you had expected. I think I heard today that managed care admissions were down so I would like some explanation of that as where it happens and whether or not it's likely to be sustained? Third, we heard you on the other side of these comments talk about capacity constraints and I am wondering to what extent your capacity constraints are limiting your growth and what your plans are for investing beyond Florida to offset that? Then fourth, you have this fact that you are investing in capacity so, there is a bit of a mixed message here the way I am seeing it that you know, yes, on the one hand you are pulling in guidance prudently to request a little bit less restraint but still grow. On the other hand, I hear what you are saying about investing in capacity so could you tell us what we should think about the near-term versus the long-term growth and expectations you have for volumes and how we should think about the company in that context?

Sheryl, thank you, it's a great question. Will do you want to lead with this?

Yes, I am just going to give some additional color and details in this. But first of all, I think you are right Sheryl, what we are saying is our growth is below our longer-term standards, but I think hopefully we are expressing that this morning. But by recent growth standards, we see it slowing. We've been through over the past 5 or 6 quarters that have been exceptional and we saw demand in our markets growing. We suspect that although as you know our market share data lags about 6 months but we suspect we were going to see some flow in demand in many of our markets and that's why we are seeing it show up in our numbers. That being said, we still have a great outlook and a very optimistic outlook for the long term in our markets. Our markets are growing in terms of population and I think we will continue to see demand in our markets and so we are going to invest to meet that expected demand. We have certain markets, I know Sam can give some color on the South Florida markets where we announced the $650 million investment. While we are doing that, Sam can describe that to you in just a minute. But we still think our markets are well positioned and we will invest to make sure we stay well positioned in these excellent markets in which we operate. So Sam, you want to add more color into that?

I don't think that in the second quarter, capacity constraints played a broad-based role in the softening. There are pockets where we know that it was difficult day in and day out to manage the capacity challenge and that could in fact squeeze out few patients here or there. But in total I don't think that was a material impact in the quarter. We have a very sophisticated approach to capital expenditures. We have capacity triggers; we have triggers that we use in determining whether or not we should consider capital in a particular situation. And so that process continues; nothing's changed. We monitor that in the context of macros within the market, and a strategic approach at a micro level, and all that we do is tied to capital decision-making. Capital takes a while to get into the marketplace; on average, you know, 18 to 30 months depending on the project because we usually do it with existing assets, so that's timing is a bit ahead. Also, I think at the point - from a capital property perspective - but specifically giving the example of the quarter, what we've done here has been approved. We packaged them up because we thought it was a very significant commitment in an effective manner for constituents in that market, but without a doubt, that is the largest healthcare demand market in HCA. So for us, just to think about the macro, we believe we have to get the capacity in play in order to sustain growth over time and in that sense, we think about these investments. This is just a very solid sort of micro, if you will, of several markets and the number of situations inside HCA and how we approach it. But capital is a very important part of market share gains, and it plays a big role in continually satisfaction, especially regarding our physicians and obviously our patients, in that they have the kind of facility presentations and the technology needed, and it will continue to play a big part of our overall efforts to grow market share and position our company to be effective in delivering care in a competitive marketplace.

I think our managed care, we were modestly there and a little bit below where we expected this year. The last six quarters have been incredibly strong for the commercial demand standpoint across all of our markets and in the commercial volume inside of HCA. We knew that was going to taper off; we didn't know when exactly and how much. I don't know that the second quarter is necessarily reflective of any near-term volume trend with respect to that. The second quarter last year had very strong commercial volume growth, and so that was part of the challenge here. We have a couple of markets where there's been some trends changes. The observation issue in the global market impacted our admissions statistic a bit, and that part of it, a couple of our Texas markets have changed, but not materially different than the company has as a whole. In Las Vegas, two of our hospitals – two of our competitors have now re-entered the provider care-contract that previously they weren't in, and we lost a little commercial business there. So there's all these little components that play into our numbers, but I think that demand will normalize in that trend. We think in that short run, intermediate run, our commercial outlook is somewhere between 1% and 2%. We think overall demand is at 2% to 2.5% potentially, but we're not to see some data in the first quarter this year to fully validate those assumptions, but that's where we believe the trends are for the HCA market.

Sheryl, one thing I might just add and that is as we all know the health exchange admissions really grew last year, they represent a small piece of the company, but if you look at what they added to admission growth last year, in the second quarter versus this year, while we're still seeing growth, that's also one factor to keep in mind when you start talking about last year's performance.

A big bill, up 2.4% year-to-date on our admission growth. You recall we gave guidance of 2.5, so we're at the low end of that range. Thinking about the short term, the next six months, we think we can finish within that range, but it certainly was quieter in the lower end.

Thank you so much.

Hi, thanks. I might switch gears and ask you about an update on the payer side. I wonder you mentioned some pressure from managed care in Florida on observation days, which we've heard from some of the others. Can you broadly comment on where you had a contract with managed care guys be aggressive on utilization review and then you mentioned, Sam, I think in your comments about underpayments? Can you comment on the government initiatives around that?

Okay, we're of that 75% for 2017 again, as consistently sent the past year terms, we have about 15% contracted for 2018 similarly. As far as the component of that, we are not seeing substantial changes in structure or provisions inside those agreements. On the observation status issue, there is more of a Medicare Advantage issue than a non-Medicare issue. There have been a little bit of a commercial side to that, we're not convinced yet that we're being dealt with equitably on some of these statuses. We're working with the payers to get more clinically driven protocol around those, and we believe that will normalize at some point. However, that out there is the issue that has been an issue but it is a little bit more advanced in the second quarter.

Regarding the payment issue, again it's hard to have current data. This is a very sort of slow-moving data-driven process with the government. What I was speaking to specifically is that in a couple of markets, we have seen the program, the fundamental initiative pilot program, have a modest impact on what falls into our rehab centers. There have been some components of our participation in those pilots where we see some modest adjustment in post-acute care referral patterns. Again, it's across the different components of post-acute. On the other side, it's way too early to be able to understand what the implications are there; we're just starting to get into the game, and again we have seen some modest changes in referral patterns but not to the point where HCA believes it compromises the opportunity to develop. We have so and fully integrate that to other components of our business, so orthopedics is an example; it's not the only driver of rehab business for HCA. Trauma is the driver; clients are the driver; delivering downstream rehab business. From that standpoint we have a little bit drag with the program, which got a lot of business opportunity on inside justifying our investment.

Thank you.

Good morning, I just want to ask about labor. It doesn't seem like you guys are having any issues, but given some of the issues that have been discussed by your peers, I would love just hearing your thoughts on what you're seeing in the market and overall labor. Thanks.

Thank you. We are very pleased with the last three quarters of performance. Our management teams in the field have responded in a very effective way. As you see in our income statement, we have been able to maintain our productivity levels, and we've been able to maintain our margin level over those periods of time. We are still facing some level of challenges. Obviously, we are using more contract labor than we want; however, contract labor for the company has stabilized over the last four quarters, and actually on a unit basis for the second quarter was below the first quarter. When we look at contract labor for just patient days, retention is a big focus inside our company right now. We have opportunities to enhance our retention and we have seen early signs of improvement at a number of hospitals that we are focused on. We have a second workshop for another 20 hospitals inside of HCA, and we're optimistic that will start to see leveraging best practices in performance there that will over time help address some of these challenges. Our recruiting function inside of HR continues to improve and get more agile in responding to dynamics in the market. We do have pockets of challenges with wages that we have to step up to deal with; some of those are being dealt with as we speak, some of them have been dealt with over the past few quarters, and some of them we will deal with in the future. Having said that, I don’t think there will be a material change in our composite average hourly rate across the company; it could move a little bit from one quarter to the other, but largely it is in the zone of really anticipated and we believe it to be manageable.

Thank you.

Good morning, a lot of good color on the top line issues, and obviously you mentioned labor. I am just curious about the bad debt side; can you talk a little bit about what you're seeing there? I noticed that sequentially your provision was down, but if there's any color on that? Thanks.

Alright, thank you Frank, and Will you want to take that?

Sure. For the quarter, we experienced a 5.7% rate, and year-to-date, it's aligning with our expectations. When examining the uncompensated care for the uninsured, as I mentioned earlier, it has remained stable over the last three quarters. Our uncompensated care as a percentage of adjusted revenue has also stayed relatively flat during this period. We expect volumes to follow this trend, which is what has been occurring. Therefore, I wouldn't describe the current labor environment as particularly stable for us at this time. Our teams are performing well as we continue to manage the collection process, and collectability in the revenue cycle has remained consistently stable over the past three quarters.

Thank you, Frank.

Good morning, thanks for taking my question. As we head into 2017, can you discuss your expectations for exchange enrollment and any challenges you might see from some changes in the exchanges?

Alright, thank you.

I'll try another scenario, obviously it's still early to predict what will happen in 2017. We've always said that we think our exchange activity will track with enrollment, and so far we haven't seen material changes market by market. But I hadn't really seen it as a material issue for us right now. I think we have to see what the enrollment trends are going to be as we project for 2017 to estimate whether or not there's an impact for us. I’m not so sure about the comments we've seen in the market on exchanges being a material issue. I don't know exactly what the impact would be in 2017. However, we have added some payers here and there, and we will lose some payers as they exit. I'm hopeful that our network is broad enough for us to absorb those and we can maintain our market share, hopefully even reposition our market share in some cases. We'll have to wait and see where the exchanges shake out.

Alright Jerry, thank you.

Thank you.

Hi, thanks. Good morning. I have a question about the outpatient surgery volumes; you mentioned that there was some impatience this quarter. I'm curious about what's occurring in the surgery centers regarding volumes and if there are any specific initiatives in your markets that might be causing this trend change.

It actually is more aligned with our historical trends. The first quarter was uniquely high; we couldn't pinpoint exactly why it was so high, but the second quarter was more in line with our historical trend. It was very balanced between our hospital and surgery centers, and our growth is fairly broad-based across the different service lines in both centers and in our hospital. We have several initiatives in our choice of initiatives that continue to yield value for us; it is a satisfactory position and helping with patient flow and patient satisfaction. Secondly, we are continuing to acquire surgery centers and endoscopic centers, and we've added quite a few additional units over the last 12 to 18 months. When we look at our composite, the outpatient surgery growth in the second quarter was about 1.5%, which reflects some of the acquisitions we've done. We believe that it will be very strategic to position alignment and greater outreach in the commercial segment, providing a larger network of offerings for HCA in the market. So we're very pleased with the results of the second quarter and we believe we still have opportunities to grow outpatient surgery volumes with our various initiatives.

Thanks, actually another thought question on the exchanges. I know that I already asked about the volume outlook; I'm just interested if you can talk about the reimbursement or rate outlook with the payers. Whether you have seen any sort of change in posture from them, particularly just interested regarding the Blue Crosses, given all the losses that they've had, are they coming back and trying to renegotiate the rates or are you not seeing any changes on the exchange side?

Well, all of our contract negotiations are a bit different depending on the market and the circumstance. But in general, there haven't been any dramatic changes in our contracts. I think a reimbursement per unit is in line with our expectations this year, and we anticipate that being the case for next year as well. So, I mean, there are pockets here and there recently made an announcement about some challenges with their exchanges. However, we have a little bit of business with what they have done in the exchanges. We tend to deal with the local and state policy more than we do Texas, Florida, Tennessee, Kansas City, and places like that. So, it's not really an issue as much as it is how local policy affects their pricing challenges, medical loss ratio issues, and so forth. But in general for HCA, there’s not a lot of change.

Thanks, good morning. I just wondered about your guidance. If we look at just the midpoint, it would call for about 5% EBITDA growth in the second half of the year versus the low twos you've had in the first half. So I do not know if you get easier given for the pressures in the third quarter, but can you talk about maybe other areas that give you comfort around that growth just given the slowdown in the top line and then maybe some of the continued cost pressures? Anything to consider seasonally high tech dollars, anything like that that would support 5% growth? Thanks.

Yes, that's right. It implies that 5% growth to get to the midpoint, I think one of the major factors you touched on to get easier, especially in the third quarter, last year we saw a little bit of solid growth, so we should have a tailwind for the third quarter. But you know when you look at our, we have factors all kinds into our guidance and where we think we can achieve the outcome for the second half of the year. But I don't expect any seasonality, typically that we see in the second half of the year, the fourth quarter especially, should follow the trend we see every year. But nothing with high tech or anything that we would call out that would be outside of normal operations contributing to that expectation for growth in the second half of the year. The fourth quarter of last year was a big number for us, so as we revised our guidance, we think the midpoint range we're at is not reflective of what our current trends are, but we're comfortable with that.

I would say one thing, too, that should help. It's on some of the contract labor issues that we've dealt with in the second half of the last year. As Sam described, although we still have opportunity to contract, it is moderating in terms of stability relative to where it is as we look forward into the second half of the year.

I'm curious if you could elaborate on the supply margins. You mentioned ongoing supply chain initiatives, but it seems supplies as a percentage of revenues have been declining almost every year for the past decade. What further options do you have to enhance pricing given the GPO? Are there other strategic moves that could help reduce this measure or at least slow the growth of supply compared to other areas? Thank you.

Hi, Andy. Thank you. Will, you want to...

Yes, let me take the first shot. As you know, supply costs as a percent of revenue year-over-year, we had a 20 basis point decline. When I look at it for the past four quarters, we have remained pretty consistent: 16.7 in Q2, 16.7 in Q1, 16.4 in Q4, and 16.7 in Q3. It’s very sustainable, and we do think that’s a remarkable accomplishment given the continued intensity increases in volume growth that we've seen over that time. Our supply chain team, as well as our field operators, have done an outstanding job from a variety of aspects around supply chain. First, relative to GPO and contracting, we still have momentum in the marketplace with the Health Trust Purchasing Group, and that continues to have strong performance. Additionally, our supply chain operations are a key component of our supply chain strategy. We’ve spoken recently about some of our initiatives around pharmacy consolidation where we can help control pharmaceutical spending utilization and inventory. That is paying great dividends as this initiative rolls through the marketplace. We also have initiatives in the operating suites, and other operational improvement activities. Coupling supply chain initiatives with the contracting statuses, I think this leads to us being able to maintain or even improve our margins on the supply cost line and keep it stable. You'll recall last year we spoke in the third quarter about some pharmacy cost elevation with our pharmacy costs per adjusted admission or adjusted patient day being elevated in the second and third quarters of last year, mainly due to some high-cost drugs that obviously received a lot of press around that. We've seen those pharmacy cost trends moderate over the past couple of quarters in response to some of the public pressure on the high-cost drugs. That has also been benefiting our year-over-year comparison.

Let me add one comment to that. I think there's another area of opportunity for HCA. Our clinical data warehouse and a number of our quality initiatives have measures tied to supply cost utilization, drug utilization, bad practice identification, and so forth. As we engage our physicians more than we've done in the past, they're understanding of how it helps them, how it helps their facilities, and how it helps their patients is another opportunity that I think we're in the early stages of execution on around supply costs. Married up with what Will just talked about on contracting supply chain operational management, coupled with data and insights connected to our physicians, is a very powerful combination that I think still has headwinds.

Good morning. This is actually Joanna Dodger filling in for Kevin. Just a quick question on your volume outlook. Do you expect to see continued slow growth but can you also comment on the pricing outlook? It seems like the first two quarters also are coming in towards the lower end of the guidance that you provide for that full year. But at the same time, it seems like the same store increases have been pretty solid. Any color on pricing you might give? Thank you.

Joanna, thanks to you.

I'll start on that. When we gave our guidance, we anticipated our revenue per adjusted admission to be 2% to 3%. Year-to-date, we're at 2.1%. We reported that number in the second quarter. When I look over the long term, that's right in range. We've had some quarters a little more in that, some within range. Sam talked about our visibility of our contracting for 2017 and 2018 for pretty consistent terms. When we look at pricing measured by revenue per adjusted admission, it's within our range and I think within our trend that we've seen over the past four to six quarters.

I would add that in the second quarter, it probably wasn't as strong because of payer mix with this commercial volume being down a bit. Obviously, that can create a little bit of volatility when you're measuring positive numbers. But within our commercial book, we are where we thought we would be and actually a bit better. Thank you.

Hi, good morning. I had a couple clarifications and then my real question. Just the first clarification, does it look like Bill, year-to-date, you're favoring discounts over bad debts at least versus the seasonality in the first half. I know the total write-off looked fine. But I just wondered if there was any policy change or anything that was driving the much slower bad debt number that obviously is offset by the higher charity discount?

I'll take that down, Gary. No policy changes related to our recognition. In any period, you're sometimes subject to nuances between uninsured discounts, charity, and bad debt. Bad debt in the second quarter was very consistent with our Q1, but no year-over-year changes, and that's why I think it's best to look at the portfolio including all three of those, and that's why they are consistent. But no changes; again, at any period, you're subject to some of that in your uninsured discount line versus bad debt, but no policy changes related to that.

Gary, you're pretty clever; two clarifications in one question. I think that's the story. I'm going to give you points and that note.

The last part of it, Sam was talking about labor cost trends. I saw it and didn't know if any of that included any anticipated impact from the new overtime rules in December as that goes into 2017. Does that create a view that...

The overtime rules for us are very immaterial and will not have a significant impact.

Okay. Then my real question, are your comments on the new cardiac bundle and what your approach has been with orthopedic bundle? Are you just contracting with risk-sharing providers in your market, and this will be a capital light investment to coordinate the risk that you're assuming there? Just your comments on how you'll approach that?

Well, I think on the varies by market a bit. We are trying to work with our physicians to identify the best course of action for our patients whether that’s the type of, how we interact with them from the hospital and so forth. It's very, very early in understanding how impactful those are. As we transition, we just received the regulations on the cardiac thing recently; it's 700 plus pages of regulations, so I think we haven't got a chance to study that yet. One new launch for us with cardiology versus orthopedic is that we employ a large number of cardiologists across HCA and our ability to integrate with them may be a bit easier than it is in some respects with orthopedics where we don’t employ as much. We will just have to wait and see how that plays out. That’s still a proposed rule. We don't know if its impact will go into effect and what the final rules will be on the cardiac side. We're prepared; we've invested in infrastructure, corporate offers in our divisions. We've educated our teams and put policies and procedures in place on the CJR. We hope to see where it goes over the next 12 to 18 months.

Alright, Gary, thank you. Shot clock's ringing. We got time for about two or three questions.

Yes, hi, thanks. Good morning. I had a question on the managed care and generally the industry trend around moving to lower cost service. So when you have 1.5% or something outpatient surgery, the inpatient is in the same range. Can you give us some color on the breakdown between the freestanding clinic and the outpatient department and what the price distinction is? How much of a volume increase do you need to overcome the price difference and if that won’t – in addition to the mix with government putting pressure on your prices?

I'm not prepared to give pricing between the two units. I mean, it's that ASCs are a bit less priced – lower priced than our hospital-based facilities. And that's because of some of the infrastructure requirements that it takes to operate a hospital-based ER and capital requirements are different and so forth. Both components have about 50% to 55% of their volume in commercial patients. So outpatient business is predominantly a commercial booking business. A number of our surgery centers have broader clinical capabilities and can provide the type of care that our hospital-based units can't, and vice versa. There are nuances surrounding this that we have to manage.

Thank you. That was helpful.

Thanks. You've been focused on growing the ASC footprint, and about the commitment to investing in outpatient. So if we take a step back and look at where you're putting capital to work, how do you see the acuity mix or mix of inpatient/outpatient changing for HCA over the next five to ten years?

Wow. I’ll say this: Fundamentally, the Company has a strategy to enhance the clinical complexion of our facilities. By that, I mean advancing into deeper capabilities. In many markets, we are adding the service lines I’ll call horizontally where we bring on new capabilities; cardiology, oncology, pediatrics, whatever. And then, vertically, we’re deepening those capabilities inside of existing service lines. All intended to ensure that we can keep a patient somewhere in the HCA system if they need deeper care or more complex care. So we import that out of our Clinical Services group and out of our service line group up here in Nashville, where we can bring technology, we can bring best practices, and we can bring specialized talent to support that. So when I view the Company’s inpatient business, I anticipate it getting more acute and more complex over time. On the outpatient side, the Company has had a very aggressive investment strategy over the last number of years. I think, Bill, our outpatient revenues are pushing 40% of our total. And so we balance out the $2.7 billion between inpatient capacity, outpatient surgical capacity, imaging capacity, clinical capacity for urgent care, and then also for Emergency Room, which is a big part of our outpatient strategy as well. So all of those pieces and parts are connected to really a balanced approach to building out our network and being attractive to our patients and our physicians. Alright, thank you, Sarah. It's 9:59. One more question.

Very kind of you. So it dovetails on what Sam was just talking about. You've made significant investments in big data and it's highly sophisticated. Obviously, this plays into all of what you're doing. But at some point, maybe this is too long a question to ask on the call. But at some point, can you help us understand how the improvements you're making in the quality of care, the outcomes, the lives saved, and the changes you're making to the process will enable you to support higher volumes and better profits in the future?

Sheryl, you've raised an important topic for healthcare in the upcoming years. We're making significant investments in this area because we view it as a transformative factor for the industry. I want to see HCA take the lead here, and I'm very encouraged by the initial results. We are focusing on our central data warehouse, especially considering the advancements in electronic health records and the shift to digital medical records. Now that we have this clinical data in a digital format, it opens up many possibilities for us. I’ll ask Dr. Perlman to elaborate on a few points, particularly regarding our initiatives to enhance patient care and reduce mortality rates from sepsis in our hospitals. This progress is evident in our facilities today. We're focusing on technical advancements and also investing in talented data scientists to help us leverage this data. Furthermore, as we transition from structured to unstructured data, we see opportunities in language processing that could significantly enhance value and support volume growth moving forward.

Thanks, Milton. And that's – we're really at the point where we can begin to realize what we consider a digital dividend of the – I mean, each day HCA has always been very operations- and science-driven in its business decisions. Every aspect of our clinical care can be captured and we can understand better, try better clinical and operational and business decisions. Bill mentioned Detroit, the gateway into improving care for patients in real time in terms of the ability to capture and even predict a lot of calls are done locally, and that it really allows us to do save lives. In that process, it also allows us to drive our processes more efficiently in terms of labor and the resources used to provide care, the supplies. It arms our MDs and caretakers with the ability to answer questions and drive our clinical integration forward in a science-driven fashion as Sam alluded to, which is really a requisite for maximizing rate reimbursement. It really is a predicate for success in bundled stock in the future. It's kind of like the doorway to really personalized dynamic precision medicine. So it's really our mechanism to channel back the inevitable data stream and results from what we do to provide healthcare and use it to drive better clinical operations decisions.

Alright, Sheryl. And everyone thank you very much for your time this morning, we appreciate it. We look forward to following up with all of you.