HCA Healthcare Inc (HCA) — Q4 2016 Earnings Call Transcript

Good day everyone and welcome to today’s HCA Fourth Quarter 2016 Earnings Conference. Just a reminder that today's call is being recorded and for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Mr. Vic Campbell. Please go ahead, sir. All right, Laurie. Thank you and good morning, everyone. Mark Kimbrough, our Chief Investor Relations Officer, and I would like to welcome all of you on today's call including those of you on the webcast. Here this morning as usual, our Chairman and CEO, Milton Johnson; Sam Hazan, President and Chief Operating Officer; and Bill Rutherford, CFO and Executive Vice President. Before I turn the call over to Milton, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties, and other factors may cause annual results to differ materially from those that might be expressed today. Many of these factors are listed in today's press release and included in our various SEC filings. Several of the factors that will determine the company's future results are beyond the ability of the company to control or predict. In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events. On this morning's call, we may reference measures such as adjusted EBITDA and net income attributable to HCA Holdings, Inc. excluding losses or gains on sales of facilities, losses on retirement of debt and legal claims cost 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 fourth quarter earnings release. This morning’s call is being recorded as you know and a replay is available later today. With that, I’ll turn the call over to Milton.

All right, thank you, Vic, and good morning each of you joining us on the call and the webcast this morning. Now this morning we issued our fourth quarter and full year 2016 earnings release. The release is consistent with the preview we issued on the 9th of January. I’ll make a few comments on the quarter and the year and then turn the call over to Bill and Sam to provide more detail on the quarter and 2017 guidance. We finished the year on a solid note with fourth quarter adjusted EBITDA totaling $2.206 billion, a record quarter for adjusted EBITDA, exceeding our industry adjusted EBITDA by 3.6%. For the year, we reported adjusted EBITDA about $8.216 billion, up 3.8% over 2015. For the full year 2016 diluted earnings per share excluding gains and losses of sale facilities and losses on retirement of debt and legal claim costs increased 23.6% over the full year 2015. 2016 was the year in which we performed well and in light of just for comparisons to prior year growth performance. We executed our growth agenda effectively in 2016 as we continued our focus on adding access points to our network, broadening service line capabilities and expanding depth in clinical service offerings. Our growth agenda has delivered consistent performance. In fact, to illustrate, the company has reported same facility admission and adjusted admissions growth for nine consecutive years, ER visit growth for 10 consecutive years and surgical growth for three consecutive years. We believe our strategies will continue to be effective and position us well for the future. We believe investing capital in our existing markets is the key component of our growth strategy. In 2016, we invested $2.76 billion in capital expenditures for expansion of services and capacity in our large fast-growing urban markets. And as you may have noted in our guidance issued this morning, we expect to invest approximately $2.9 billion in 2017. Moving to cash flow, we generated $5.65 billion of cash flow from operating activities in 2016, up 19.4% over 2015. In 2016, as Bruce will mention, we invested $2.7 billion in capital expenditures, we distributed $434 million to non-controlling parties producing free cash flow of approximately $2.5 billion. We returned $2.75 billion to shareholders in the form of share repurchases, which resulted in HCA repurchasing about 36.3 million shares of our stock or approximately 9% of our outstanding shares since the beginning of 2016. On this subject of capital allocation, the company has not paid a regular dividend since its IPO here in 2011. And we have decided to maintain our current policy on dividend payouts. Although we remain confident in our long-term growth prospects, we believe it’s prudent to take a conservative approach and maintain maximum financial flexibility until we gain greater clarity on health and tax policies at the federal levels. Today, we believe share repurchase is the appropriate means to return free cash flow to shareholders, but we will continue to evaluate our policy over time. I’d like to take a moment to comment on our recent settlement with the Healthcare Foundation of Kansas City. The Missouri Court of Appeals recently reversed key parts of an earlier court's decision and confirmed that we spent in excess of $450 million during the five-year term following our acquisition of the Health Midwest Health System in 2030. While we disagree with the remainder of the Court ruling, we felt it was best to end this long-standing dispute and we have entered into a final resolution agreement with the Healthcare Foundation of Kansas City. In the 14 years since our acquisition at Kansas City, we have invested over $1 billion in the market to expand and upgrade our facilities and add new services, and I’m very proud of the work we have done in Kansas City. I’m proud of the settlement, and based on the earlier court’s decision, the company had reported a liability of $478 million. This settlement of $188 million brings a final resolution to this dispute and allows us to continue our focus on caring for the Kansas City community. I’ll close my comments with my thoughts on our 2017 guidance included in our release this morning. With respect to adjusted EBITDA growth, our guidance yield was approximately 2.5% to 6% growth for 2017. Our guidance reflects continued volume growth, reasonable pricing and well-managed expense growth. I am looking forward to 2017, and I believe the company is well positioned to achieve its goals for the year. And with that, I’ll turn the call over to Bill.

Great. Thank you, Milton, and good morning, everyone. I will cover some additional information relating to the fourth quarter results and review our 2017 guidance, and I’ll turn the call over to Sam for some comments on our operations. As Milton commented, we are pleased with the quarter’s results. The fourth quarter was a difficult comp for us with a strong result we had in Q4 of 2015. However, our extensive management helped to deliver another good quarter and solid performance for the year. For the quarter, adjusted EBITDA increased 3.6% to $2.206 billion from $2.131 billion last year. Adjusted EBITDA margin in the quarter was 20.7% versus 20.8% last year. In the fourth quarter, our same facility admissions increased 1.6% over the prior year and equivalent admissions increased 1.5%. During the fourth quarter, same facility Medicare admissions and equivalent admissions increased 2.7% and 3% respectively. This equates to both traditional and Managed Medicare. Managed Medicare admissions increased 5.3% on a same facility basis and represents 33.6% of our total Medicare admissions. Same facility Medicaid admissions and equivalent admissions increased 3.1% and 3% respectively in the quarter, consistent with recent trends. Same facility self-pay and charity admissions declined 0.3% in the quarter, representing 7.6% of our total admissions compared with 7.7% last year. Managed care, another which included exchange admissions, declined 0.4% and equivalent admissions were essentially flat on a same facility basis in the fourth quarter compared to the prior year. Same facility emergency room visits increased 1.6% in the fourth quarter compared to last year. Same facility self-pay and charity ER visits represented 19.3% of our total ER visits in the quarter, slightly lower than the prior year. Intensity of service, or acuity, continued to increase in the quarter with our same facility case mix increasing 3.3% compared to the prior year period. Same facility inpatient surgeries increased 1.4% and outpatient surgeries declined 0.6% from the prior years. Same facility revenue per equivalent admission increased 1.9% in the quarter. Same facility managed care and other revenue per equivalent admission increased 5.5% in the quarter, which is treated consistent with our recent trends. Same facility managed care and other case mix increased 3.4% compared to last year. Same facility charity care and uninsured discounts increased $660 million in the quarter compared to the prior year. Same facility charity care discounts totaled $1.047 billion in the quarter, an increase of $82 million from the prior year period while same facility uninsured discounts totaled $3.469 billion, an increase of $578 million over the prior year. Same facility operating expense per equivalent admission increased 2.8% compared to last year's fourth quarter. Salaries and benefits as a percent of revenue were down slightly to 44.8% compared to 44.9% in last year’s fourth quarter. Same facility supply expense per equivalent admission increased 5.3% for the fourth quarter compared to the prior year; this increase was primarily driven by growth in medical device expenses, increased volume, and some higher acuity services. Other operating expenses included 30 basis points in last year’s fourth quarter or 17.7% of revenue mix. Let me touch briefly on health reform activity in the quarter. In the fourth quarter of 2016, we saw approximately 12,300 same facility exchange admissions compared to 11,300 in the fourth quarter of last year. For the full year of 2016, our health exchange admissions increased approximately 15% over 2015 levels and represented about 2.7% of total admissions. We saw about 43,900 same facility exchange ER visits in the fourth quarter compared to 38,000 in the fourth quarter of 2015. For the full year 2016, health exchange ER visits increased 23% and represented 2.4% of total ER visits. All in all, health reform activity was generally in line with our expectations. As reported, earnings per share for full year 2016 was $7.30 as compared to $4.99 in the prior year. 2016 earnings per share included positive benefits of $0.39 from the Kansas City legal settlement, $0.41 from the effects of the adoption of a new accounting standard related to tax benefits for equity awards, and $0.13 from the completion of federal tax audits for 2011 and 2012. Let me touch briefly on cash flow. The strength of our cash flow and the disciplined approach to capital allocation remains an important advantage for the company. In the fourth quarter, cash flow from operations was $1.699 billion compared to $1.558 billion last year. For the full year 2016, cash flow from operations was $5.65 billion, up over $900 million from $4.73 billion last year. As we mentioned throughout the year, cash flow from operations includes approximately $160 million for the full year of 2016 from our adoption of the accounting standard on reporting the tax benefits related to equity awards. After adjusting for this accounting change, cash from operations increased approximately $740 million or just over 15%. In addition, cash flow from operations included an improvement in net AR days, decreasing from 53 last year to 50 at December 31, 2016. Capital spending for the year increased to $2.76 billion from $2.375 billion in 2015, as we continue to invest in long-term growth opportunities for the company. Free cash flow for 2016 was $2.459 billion, a $595 million increase or 32% over $1.864 billion in 2015. As a note, we completed $2.75 billion of share repurchases during the year. We had approximately $1.85 billion remaining on our $2 billion authorization as of December 31, 2016. At the end of the quarter, we had approximately $2.1 billion available under our revolving credit facilities and our debt to EBITDA ratio was 3.8 times. Additionally, it is important to highlight this activity through our capital market transactions. Over the past couple of years, we’ve reduced our weighted average interest costs to approximately 5.3% at December 31. Our return on invested capital was approximately 16.6% as of the end of the year. These cash flow and balance sheet metrics highlight an important strength for the company and allow us to continue to invest for long-term growth, distribute value to our share repurchase program, maintain ample liquidity, and maintain our leverage ratio towards the lower end of our stated range, all of which position us very well going into 2017. So with that, I’ll move into a discussion about our 2017 guidance. Highlighted in our earnings release this morning, we estimate our 2017 consolidated revenues should range from $43 billion to $44 billion. We expect adjusted EBITDA to be between $8.4 billion and $8.7 billion. Within our revenue estimates, we estimate equivalent admissions growth to range between 2% and 3% for the year, and the revenue for equivalent admissions growth to range between 2% and 3% for 2017. We anticipate our Medicare revenues for equivalent admissions to reflect a composite growth rate of approximately 1% to 2%, factoring in market basket changes, ACA reductions, as well as some anticipated increases in intensity. Medicaid revenues for equivalent admissions are estimated to be flat year-over-year, and managed and commercial revenues per equivalent admission are estimated to grow between 4% and 5%. We also anticipate growth in share-based compensation of approximately $40 million. The anticipated operating expenses per adjusted admission growth is approximately 2.5%. Relative to health reform, we do expect some modest growth in health exchange volumes, but isolating the net EBITDA impact from health reform to core operations is becoming more subjective and increasingly difficult. We will continue to report on exchange volumes which we can identify, but converting these variables to an EBITDA impact has become harder in this fourth year of reform. As an overall summary, we believe the reform contribution in 2017 will be materially equivalent to the contribution we experienced in 2016. Relative to other aspects of our guidance, we anticipate capital spending of $2.9 billion in 2017 as we see continued opportunities to invest in our markets and support key strategic initiatives. We estimate depreciation and amortization to be approximately $2.05 billion and interest expense to be approximately $1.7 billion. Our effective tax rate is expected to be approximately 34%. Lastly, our average diluted shares are projected to be approximately 376.5 million shares for the year, and earnings per diluted guidance for 2017 is between $7.20 and $7.60. Earnings per diluted share guidance includes an estimated $150 million income tax benefit, or $0.40 per diluted share, related to the accounting standard on recording excess tax benefits related to equity awards, but does not include losses or gains on asset sales, losses on retirement of debt, or legal claim costs. So, that concludes my remarks and I’ll turn the call over to Sam for some additional.

Good morning. Let me begin by giving you some of the volume stats that are normally provided on these calls. Once again in both the quarter and the year the company had broad-based volume growth across our market and across most of the facilities in service lines that make up our business. For domestic operations on a same facility basis, eleven of 14 divisions had growth in admissions in both the quarter and in the year. Non-division had growth in adjusted admissions in the quarter and 13 divisions had growth in the year. 10 divisions had emergency room visit growth in the quarter. Free standing emergency room visits grew 11% and accounted for approximately 60% of our overall ER growth in the quarter. Hospital-based emergency room visits grew 0.7% in the quarter. In the year, 13 divisions had emergency room visits growth. Inpatient surgeries grew 1.7% in the quarter, surgical admissions were 28.1% of total admissions in the quarter. Inpatient surgical volumes were particularly strong again this quarter in cardiovascular, orthopaedics and neurosurgery categories. For the year, surgical admissions were 28.3% of total, which is an increase over the prior year. 10 divisions had inpatient surgeries growth in the year. Outpatient surgeries were slightly down in the quarter, about 0.6%; hospital-based outpatient surgical volumes declined 0.5% and volumes declined 0.7% in our free-standing ambulatory surgery division. Seven of our divisions in a quarter had growth in outpatient surgery volume. In the divisions that were down, multiple service lines accounted for the decline. For the year, outpatient surgeries grew 1.2%, with 11 divisions showing growth. Behavioral health admissions grew 0.8% in the quarter and 2.2% in the year. Rehab admissions grew 5% in the quarter and 3.3% in the year. Deliveries were down 1.8% in the quarter and down 1% in the year. Again, most of these declines were in Medicaid payers. Neonatal admissions increased 0.5% in both the quarter and the year. Cardiology procedures grew 4.7%, which is generally consistent with the growth rate for the year. Trauma volumes grew 18% in both the quarter and the year, observation visits were up 2.7% in the quarter and it grew 7% in the year. All in all, the fourth quarter in 2016 were solid periods of growth for the company and they continue to show, as Milton said, a consistent pattern of growth over many years. We believe our strong portfolio of markets and favorable trends within them should yield overall demand growth in the range of 2% to 2.5% per year over the next few years. Our approach to these markets remains the same as we strive to be the provider system of choice for patients and physicians; the improvements we have made in clinical and operational metrics, coupled with our increasing capital spending position the company well from a competitive stance and should provide solid growth prospects in the future. The company has over $4.5 billion of capital in-flight that is just to hit our markets. This in-flight capital includes approved projects that are not yet in service and should be completed over the next three years. It will add urgent care centers and free-standing emergency links to our provider systems allowing us to improve patient access and experience with more conveniently located facilities. Additionally, it will increase capacity in existing hospitals by adding more inpatient beds, emergency room beds, and operating suites, thus relieving constraints in many situations. And finally, it will enhance service line offerings with new equipment in clinical technology which will provide a better environment for nurses and physicians in delivering care to our patients. In addition to capital spending, our growth agenda includes a coordinated marketing strategy, patient care coordination systems, and multiple human resource programs that are particularly focused on physician development and nursing operations. This agenda is supported by strong execution systems and resourced by the unique scale and operational capabilities of HCA. In sum, we believe we continue to have solid growth opportunities across our diversified portfolio of market and services lines and we believe our local provider systems are well-positioned to capitalize on these opportunities in the future. With that, let me turn the call back to Vic.

Thank you, Simone, Samuel, and Milton. Lori, if you can come back on and poll for questions, and as we always do, I encourage each of you to limit yourself to one question and if you have a second, jump back in the queue.

Hey, thanks. Maybe just to start with that last point, Sam, if you could perhaps elaborate a bit more on some of the certain, the capital priorities for 2017 or maybe just broadly the $4.5 billion of in-flight capital that you referenced. Is there anything that's more unique or different this year versus the prior year or any specific larger project that we should be aware of and then maybe if you could just comment quickly on just the cash flow expectations for 2017? Thanks.

With respect to the capital spending plan for the company, for the most part, there aren't any significant changes in our approach to capital spending. We believe the company has growth prospects in many of our markets. We've been investing to take advantage of those growth prospects by expanding, like I said, our networks where we're adding facilities and so forth. And then at the same time, we have a number of facilities that are operating at unusually high occupancy levels, forcing us to address certain capacity constraints. When you look at our capital spending that we report in our cash flow statement, some of that capital is being spent, but it takes a while for these projects to come online and that's why I wanted to give you a sense of what's in the pipeline for the company because we have been accelerating our capital spending. And as this capital starts to come online more in 2017 and 2018 than it is coming online in 2016 and 2015, we expect to add roughly 1% to 1.5% to our bed capacity on the inpatient side, roughly 4% to 4.5% on our emergency room side. We think those are important components of our overall growth strategy. We spent about $250 million a year on our key capital; we spent about $1.5 billion on routine-related capital, and the balance tends to be more strategic addressing these growth prospects and addressing some of these capacity constraints. No bolus is unusually going to one market or the other, so it’s diversified from the standpoint of market. It's further diversified from the standpoints of facilities within those markets and then from a service line standpoint. I would submit that it's quite diversified as well and we think this is a very conservative deployment approach. It's very effective in resourcing our growth agenda across the company. And we're optimistic that it's going to yield value for the company over time.

Yeah. On cash flow, we anticipate cash flow from operations to range somewhere between $5.3 billion and $5.5 billion; will be down slightly from this year due to the some anticipated increase in cash taxes.

Got you.

What Sam said about increase just to frame it, I'm looking here, it's a two-year period in 2012 and 2013. We added about 800 inpatient beds during that two-year window; in 2014 and 2015, we added about 900 new inpatient beds, and for 2016 and 2017 two-year period, it will be almost 1000. So as Sam was saying, this is increasing the amount of capital coming online, we expect that to grow, we’ll make about 2017 and 2018 as well.

Thanks, hi, everybody. I'm going to try to squeeze in two here real quick, if I could. One, obviously there's been a lot of focus on the repeal-and-replace discussion, but there's other things that are in the works too, one of which is the repatriation potentially. You guys have been overseas, in London in particular, for a long period of time. Do you have any significant cash that you might consider bringing back if there is a holiday? And then my strategic question was, in the last couple of years, we've seen payers get involved in purchasing physicians, then they moved to urgent care centers, and now very recently there's been this move to ASC markets. Any thoughts about that? Has that changed the competitive landscape? Has it changed anything that you want to do or just business as usual? Any response to that new competitive evolution?

A.J., real quick on the cash overseas. We have had London international operations. We have approximately $400 million cash overseas that if there's an opportunity, that would give us some opportunity to repatriate that, so we’ll just wait to see how certain tax policies may unfold to see how we deal with that progress.

A.J., what’s your second question about payers…

Well, there has been significant movement across our markets where payers are entering the provider space. Optum and United have made a couple of strategic acquisitions, but they’re sprinkled from one market to the other and they don’t really have what I call a concentrated influence on any one particular market. Obviously, we see opportunities for us to work with the payers as they try to build out provider assistance because what we’re doing as an organization and we’re having discussions with the payers around using our network and our footprint in these areas to accommodate their objectives and we think there’s a lot of opportunities there for HCA and other payers to accomplish that. But we’re not seeing any significant competitive dynamics to date, nor do we see it in the foreseeable future coming from those strategic moves across the markets; again, within a particular market, there could be a bit of concentration around that, but we had some of those situations in the past in markets already, and we seem to be able to work with the payers or around the payers in those emphasis to accomplish what we need to get done in those individual markets.

Thank you.

Great. Just wanted to understand the comments around capital deployment; you mentioned both wanting to understand the impacts of the healthcare regulatory environment as well as the tax policy. Which one is more of a driver, in your view? And when you think about the impacts on healthcare, is there an expectation that there may be an acceleration in deals going forward if things do change for the worse? Would you expect the M&A to be a bigger part of this, or would you still expect, for the most part, your share purchase to be the biggest use of excess free cash flow?

Kevin, thank you. Milton, do you want to…

Yes. And Kevin, it’s Milton. You’re asking which one I guess is most important for emphasis, health policy changes or tax changes and with respect to our decision around dividend payment, I’d say it’s equally driven, right now we need to understand how our dividends will be taxed in the future versus share repurchase opportunities. And so you know, we’d like to have some more clarity around that before we make the decision on a dividend and have a fixed charge on the company. Obviously, health policy is something we’re concerned about as well, and we’re following very closely in Washington. So, I can’t really, necessarily rank them because they’re both important to the decision around the dividend. I think with respect to opportunities for acquisitions in this environment, we do have a pipeline today. I’ll comment. I will comment that I think, I will also say that the pipeline today is a little more robust than it has been in recent years and the transactions feel like they could be more realizable, and that’s just my kind of feel for the market right now. So, that’s a piece of it, but with our strong cash flow that we have and strong balance sheet, I feel like we’ve got the ability to remain active with the share repurchase program and to be acquisitive. So I don’t see a trade-off there, but we would like, as I said in my comments, we want to remain at this point conservative with our approach. We won’t maximum financial flexibility for the company to be able to take advantage of opportunities that could come in the coming few months or few years. So we will, as I said in my comments, consider evaluating our policy around dividends going forward is just in the current environment. We’d like to have more clarity before we make any decision, that’s really a permanent decision with respect to the company’s use of cash.

Kevin, thank you.

Yes, just a question, as you think about potential tax reform in particular, are you trying to get EPS to be the primary earnings metric that investors look at? And is that something that you've found investors are more receptive to as compared to a few years ago?

Matthew, this is Milton and Bill maybe jump in, but we definitely believe that investors should be looking at EPS. We have been a consistent repurchaser of our stock. We believe we’ve created a lot of value for our shareholders since the IPO. I don’t have number on top of my head, but billions of dollars maybe approaching $10 billion of share repurchase since the IPO. So we think that’s a very effective, also very tax-effective way to return cash to shareholders and of course this results in higher growth in EPS. So it is something we would like investors to focus on with our current strategy. We think it’s a low-risk way to return cash and create value for our shareholders and so we definitely think that it should be a metric that our investors should be paying more attention to.

Thank you, Matt.

Thanks, good morning. Just wanted to ask one clarification and jump off my question. Sam, you said 1.5% growth in patient beds and 4% growth in capacity. Is that an annual number and over what period is that? Just want to confirm.

It is an annual number. That’s on average; I mean, we have about 38,000 inpatient beds that are operational, so the 400 or so that Milton counted, it’s a 1% increase in capacity and then our ER beds we have about 5,000 ER beds, so if we’re adding 200 – 150 to 200 then next we’d get to the 4%. Its important to understand that our inpatient bed occupancy for the company is at record highs, we’re operating over 70% in patient occupancy utilization on our operating beds. Our emergency room utilization is running almost 90% utilization. Again, those constraints create some challenge for us in many facilities until our capital can get there. So that's where the numbers come from, Justin. Those are some of the metrics underneath that, and that's how we are thinking about the roll forward there.

All right. Now we will get to your questions.

Hi, thanks. Just a question around the outpatient services trend, there may be specifically ASC volumes with outpatient surgery actually taking negative. I am curious if there is something going on, I mean anything that you can point to that would be a change? Do you think there is now saturation of facilities as there is too much competition, or is it just a one quarter doesn’t make a trend and we will see later?

In general, I think it's more of the latter than anything else. There hasn’t been a significant amount of new supply of Ambulatory Surgery Centres across our markets. We do have some under this movement of our physicians from centers to the others, that sort of typical, and we've had pretty good growth trends and are able towards our surgery center division, as well as our hospital-based outpatient units over the past few years, but the last two quarters has been a little softer than we anticipated. We do have had company divisions showing growth in half that are down with a variety of reasons driving some of the declines in some of the markets. I was still bullish on both components of our outpatient surgical initiatives. We are investing in capacity in those areas in some markets; we are adding technology and others, and we continue to work with physicians to create the environment that they want for their patients. And I anticipate that we will be back to our normal growth period, our growth trend over the coming periods.

I just agree with what Sam is telling and I am looking here at our freestanding outpatient surgery growth each quarter. This is the first quarter we had negative growth in the line of 8 to Sam's. So we have been very consistent growth around, just under 3%, and first quarter of 2016 the manufacturing growth was 5%. So it's been a consistent grower for us. This is the first quarter that we reported negative growth in freestanding outpatient surgery. Next quarter.

Thank you, Josh.

Hey, good morning, guys. Milton, as we think about the ACA obviously a lot of unknowns there, but where guys were sitting right after the election? What's the view or what was the decision internally in terms of like the Plan D as we think about the potential appeal in terms of dedication and driving growth going forward?

I believe there is significant uncertainty regarding our customers, especially concerning potential replacements. The management team is confident that if there is a repeal, a replacement will follow, although we don't know what that replacement will entail or how many people it will cover. However, I don't anticipate going back to the uninsured volume and population percentage we experienced in 2014. We have a strong history of adapting to market changes and healthcare policy adjustments, and I am confident we will navigate this situation effectively. Currently, I don't see any changes to our operations or strategy, as we are moving forward, investing capital, and observing increased demand in our markets. While the exchange business is significant to us, it only accounts for about 2.5% of our overall volume. We are closely monitoring the marketplace to respond promptly to any changes. Over the next year, we will keep a close eye on market developments and how any health policy changes may affect the ACA. We intend to clearly communicate our findings to investors and assess any potential impacts. For now, we remain optimistic about our guidance for 2017, and we will evaluate how circumstances unfold later in the year.

All right. Thanks, Brian.

We are closely monitoring developments to gain clarity on how potential changes to health policy over the next two or three years might affect the ACA. We will communicate this clearly to our investors and strive to quantify any potential impacts. For now, we are optimistic about our guidance for 2017, and we will assess how the situation unfolds later in the year. Thank you, Brian. Next, we will move on to Ralph Giacobbe at Citi.

The market share data that we have, which is most current, is through the second quarter of 2016. Our overall market share is flat. So we have seen some pressures on our overall market share where we are flat at around 25% for that 12 month period ending second quarter of 2016. I think there are two issues for overall market share being flat. One, we have seen increased competition as I have mentioned in the past in the form of new facilities in a lot of our markets, both on the inpatient side and the outpatient side, and we can point to that as a fairly significant contributor to some of the pressure. And then the second point, which ties right back into our capital discussion, as we do have significant capacity constraints in a number of our facilities that are poised for growth. I understand we get this capital along, and we think that will open up some market share opportunities for the company. On the commercial side, we have seen a little bit of drop in our market share; it's isolated to a handful of markets, but they happen to be big commercial markets for ACA where we've seen an accelerated level of competition in some of these suburban markets where there is density of commercial lot. We have what we think are responsible strategies for dealing with that; that’s where urgent care outreach, some physician initiatives and marketing strategies, we think are going to help in that particular funds, but it is quite competitive on the commercial side in many of our markets.

Thank you, Ralph.

Thank you so much. So it was tough comp and not an easy business ever, so good job. And thank you for the guidance and the explanation. I want to dig in a little bit more into your thought process about the 2017 and then preparing perhaps for changes in the ACA. So for 2017 you help me think about how if you are positioning the company vis-à-vis what we seem to see in the rest of the industry, which is declining inpatient utilization coupled with what sounds like some changes in the dynamic with managed care in some of your markets. When do you start seeing that pressure reverse? Is it a second half 2017 where do you start to get the lift of the investment you are making versus the competition and maybe gaining back some of that commercial market share, or are we likely to see some increasing pressure of managed care trying to outpatient at the hospital and balancing that out? As we kind of look the way we do at the beginning of the year, because I think that volume assumption is really key to the guidance.

Let me first clarify that we do not believe inpatient utilization is decreasing. We think the ACA market is expanding due to population trends, such as the aging of the baby boomers and advancements in clinical technologies. These factors that have historically driven demand are likely to boost demand in the future, at least in the intermediate term. We experienced a significant volume growth over the past five or six quarters, which creates some comparative challenges for us in the previous year. However, we have seen a sort of normalization and believe that the markets will produce inpatient demand growth of about 2% across our market. Regarding managed care activities, I do not see any significant unique initiatives affecting the market. Any changes are minor and do not impact overall demand, nor do we foresee this in the short to intermediate term. Therefore, these dynamics are not notably recognized in the ACA market. Concerning our capital and initiatives, funds will flow throughout the year, with many projects going live at different times in 2017 and 2018. It's hard to predict a substantial increase in volume in either half of the year that will significantly alter our prospects. The changes will integrate gradually into our overall capacity and opportunities consistently over time. We are not expecting anything out of the ordinary. As for our strategy regarding the uninsured, our activity in that sector was flat to down this past year.

4% growth. We were down in the fourth quarter.

Yeah in the fourth quarter. And we've gone through cycles where payer mix have shifted a bit, clearly for us it’s the variable cost that we would incur in taking care of those patients. As the incremental impact, obviously, if the Affordable Care Act strips away 100% of the insurance, like Milton was saying, that's a different dynamic for us, but I don't think it significantly changes our core strategy maybe some things on the fringes around how we pace initiatives or how we do certain decision making around that. But we still have opportunities we believe on the core operations of HCA and that they can continue to yield value for the company.

All right, thanks, Sheryl.

Good morning, thanks. You did a good job of controlling labor expense in the quarter. Can you talk about the broader pressures you're seeing on labor supply and how much of that is a risk to your numbers in 2017 and then maybe just comment on the robust, taller growth that you saw this year?

Okay, this is Sam again. On labor expenses, I’m really pleased with how the company was able to manage it for labor expenses this year. We saw the modest productivity improvement which I think is somewhat of a reflection of the operating leverage that we have from the volume growth. We were able to moderate our contract labor growth for the year; it was only up 6% for the quarter, it was up 4%. Nursing continues to be a challenge for the company, but we are making progress with a number of our initiatives around onboarding nursing, around training nurses, around recruitment in those areas, and we still continue to manage that particular component of our expense structure effectively. The trends going forward are modestly under pressure compared to this past year; we are expecting wages to be up a little bit, maybe 50 basis points over where they were, but that’s embedded in the guidance that Bill gave. From the supply and other expense standpoint, no significant inflationary pressures that we see at this particular point in those categories that will create any unusual risk in our expense structure for 2016. So we feel pretty good about where the company is. From that standpoint, we have a host of initiatives underneath our expense structure that are driving toward efficiencies and we continue to evolve those. They center around better labor management approaches with one HR platform, our performance improvement change which we’ve talked about in the past continue to find opportunities to enhance processes in our facilities and efficiencies; and in our clinical agenda it’s continuing to identify opportunities to improve supply cost utilization, blood utilization, better patient length of stay, and those kinds of things. So the combination of those are still a positive opportunity for HCA and one in which we believe we can execute on and mitigate some of these pressures. Thank you, Gary.

Hi, my question has been answered. Thanks.

John, thank you.

Thanks, good morning. With the caveat, as you said earlier, it's getting harder to estimate, but could you just confirm what you think ACA contributed to EBITDA in 2016 and whether that's in line with what you're expecting?

Yes, it did in discover, it was in line with our expectations. We said this is contributing 5% to 6% of adjusted EBITDA, and that's a double from 2016.

Okay. Thanks.

Thank you, Michael.

Thanks, if you can give us an update on the Florida Medicaid outpatient rate cuts and what you are assuming in guidance. And I know that you and some of your peers have been protesting those so just interested if there’s an update on that process there.

No, there are several offers to try to adjust that, but it does not have a material impact on HCA or inside our guidance for 2017.

All right.

Thank you, Scott.

Hi, good morning. I have kind of a two part on CapEx just because it's such a big part of the strategy. It's more than doubled since the IPO. It's running almost 7% of revenues in the 2017 guidance, which I think is around the highest in the decade. So the two part question is, is there a point where you see absolute CapEx dollars coming down? Are we kind of rolling on a kind of a bolus CapEx cycle and that could slow? And just the reason I ask is, I know you're trying to point investors towards earnings, but in 2016 there were $2.7 billion in CapEx and only $1.9 billion of depreciation; so there's certainly some EPS benefit that isn’t reflected in free cash flow program and just wondering when those two numbers might narrow?

Gary, let me take a shot at it, but this is Sam and then Bill also may have some comments on it. So our capital spending is really a direct reflection of the opportunities we see in the marketplace and demand that we see. Sam was talking about in certain markets. If we don't invest and expand to add more capacity, then our growth will be limited by lack of capacity. So we're trying to stay up to speed of that or ahead of that, and so we have been increasing our capital spend up to record levels. Quite frankly at the same time, as Bill mentioned in his comments, we have been reporting and seeing record levels of return on invested capital as we’ve been spending more capital. So I think those investments have turned out to be very solid and good investments and value-creating opportunities for our shareholders. Now if the marketplace changes, we certainly have the ability to ratchet down capital spending. And so we've been through different cycles before. When we went through the recession back in 2009, it takes a little while to ratchet down because the project is in process, but we didn’t have the ability, and we demonstrated the ability to slow it down based on market needs, and the like. So I don't see today as being any different. So right now, we're seeing demand in our markets and we're investing to meet the requirements of that demand, and again, I've been quite pleased with the return overall on the investments that we've been making.

Gary, I think we got time for maybe one more question.

Hey, thanks for fitting me in. I was just curious about patient access and maybe going back to the growth in the ER beds. Wondering where that's coming from in particular, is it mostly growth in the freestanding ED space or is it hospital ER beds? And just given the competition that's increasing in the freestanding ED space, are you spreading that growth to other markets that you have where there's just less competition? Or are you still seeing growth in some of your more concentrated areas?

Let me give you some facility numbers. First Paula, this is Sam again. On the urgent care side, we operate 72 urgent care centers today. And we believe to be somewhere around 120 urgent care centers by the end of the year. The freestanding emergency rooms we operate roughly 62, I think today. One of them just got converted to a hospital yesterday actually, it opened in Orlando, Florida, so we're down to 61 I think as a result of that conversion. But we should be somewhere around 80 freestanding emergency rooms in operation by the first part of 2018. But when you look at the bed top of emergency room beds growth, it's a blend of between probably 50-50, thereabouts. I don't have the exact number on the top of my head, but it's pretty close to that, between hospital ER bed expansion as well as freestanding emergency room expansion. I do think some of the market dynamics for freestanding emergency rooms have slowed a bit. We're not anticipating the growth in competitor units in 2017 that we've seen in the past 24 months. And so we see opportunities for HCA to deploy these facilities strategically across various markets to put our network in the best position they can possibly be. All right, Paula, is that helpful?

Thank you. That was helpful.

You are very welcome. I want to thank everyone for being on today’s call. We look forward to talking to you and seeing you soon.