HCA Healthcare Inc (HCA) — Q2 2024 Earnings Call Transcript

Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and our CFO, Mike Marks. Sam and Mike will provide some prepared remarks, and then we'll take some questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements that 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. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA is included in today's release. This morning's call is being recorded, and a replay of the call will be available later today. With that, I'll now turn the call over to Sam.

All right. Thank you, Frank, and good morning to everyone. The Company's results for the second quarter were positive across the board and reflected strong demand for our services. In addition, our teams continue to execute our strategic plan effectively and produced positive outcomes for our patients, while also enhancing our facilities, including better throughput and case management. I want to thank our HCA colleagues for their outstanding work and their continued pursuits to innovate and deliver on our mission. As compared to the prior year, diluted earnings per share adjusted increased 28% to $5.50. Consistent with the first quarter, we saw broad-based volume growth across our markets and service lines. On a same facilities basis, in the second quarter, inpatient admissions grew 5.8%; equivalent admissions grew 5.2%; emergency room visits increased 5.5%; inpatient surgeries were up 2.6%; outpatient surgery cases were down 2%; and like the first quarter, the declines were mostly explained by lower volumes in Medicaid and self-pay categories. Similar to the past few quarters, other volume categories, including cardiac procedures and inpatient rehab services, experienced strong growth. Payer mix improved year-over-year with commercial volumes representing 36.2% of equivalent admissions. The acuity of our inpatient services, as reflected in our case mix index, increased slightly compared to last year. These factors helped generate same-facility revenue growth of 10%. Also in the quarter, we progressed further on our cost agenda and produced solid operating margins. As we transition to the last half of 2024, we are encouraged by the Company's results. We believe the increased investments we are making in our people and facilities, along with our disciplined approach to operations, will continue to produce positive outcomes for our stakeholders. In closing, given our year-to-date performance and the backdrop of strong demand that we forecast for the remainder of the year, we have updated our guidance for the year, as indicated in our press release. With that, let me turn the call over to Mike for more details.

Thank you, Sam, and good morning, everyone. The second quarter showed continued solid performance with strong demand, improved margins, and a balanced allocation of capital. Sam reviewed our top-line results, so I will cover operating costs in the quarter. Operating costs were well managed, resulting in a margin improvement of 100 basis points compared to prior year and sequentially through the first quarter. Labor cost has improved 200 basis points from the prior year. We continue to see good results in contract labor, which declined 25.7% from the prior year and represented 4.8% of total labor costs. Supply costs as a percent of revenues improved 50 basis points from the prior year. Other operating costs as a percent of revenue did grow compared to the prior year, but it remained relatively consistent for the past four quarters. We were encouraged that year-over-year same-facility professional fee costs growth moderated to approximately 13% in the second quarter, which compares favorably to the 20% increase we experienced in the first quarter. Adjusted EBITDA was $3.55 billion in the quarter, which represents a 16% increase over the prior year and included a modest benefit from Medicaid supplemental payments. As a management team, we are very pleased with the operational performance of the Company. Moving to capital allocation, we continue to deploy a balanced strategy of allocating capital for long-term value creation. Cash flow from operations was just under $2 billion in the quarter, which is a decline of $500 million compared to the prior year, driven by income tax payments and timing of Medicaid supplemental program accruals and cash receipts. Capital expenditures totaled $1.28 billion, and we repurchased $1.37 billion of our outstanding shares in the quarter. We also paid about $170 million in dividends. Our debt-to-adjusted EBITDA leverage remains near the low end of our stated guidance range, and we believe we are well positioned from a balance sheet perspective. Finally, in our release this morning, we are updating our estimated guidance for 2024. For revenues, our new guidance range is $69.75 billion to $71.75 billion; net income attributable to HCA Healthcare is $5.675 billion to $5.975 billion; adjusted EBITDA is $13.75 billion to $14.25 billion; and diluted earnings per share is $21.60 to $22.80 per share. Based on the strength of our year-to-date results and our revised outlook, we estimate that share repurchases will be around $6 billion in 2024, subject to market conditions. With that, I'll turn the call over to you, Frank, for questions and answers.

Thank you, Mike. Ellie, you may now give instructions to those who would like to ask a question.

Maybe just two areas that people are very focused on: supplemental payments. How is that running relative to your expectations? And in your back half comments, are you including anything for Tennessee? And then the other area being the public exchanges, what is the trend there year-to-year? And how much is growth in that helping for these strong results?

Thank you, A.J., this is Mike. I'll take the supplemental question. I think as you're aware, Medicaid has historically been our most challenging payer, other than patients without insurance, typically paying us significantly below the cost of caring for Medicaid patients. Over the last several years, most states in which we operate have implemented or enhanced Medicaid reimbursement through supplemental payment programs. While these supplemental programs are growing, it is important to put them in context. They can be complex, variable in their impact from quarter to quarter and, when taken together with historical Medicaid reimbursement, are still well short of covering the cost to treat Medicaid patients. We believe it is important to understand this backdrop when discussing these programs. But now to the quarter. In the second quarter, we recognized a year-over-year earnings increase of approximately $125 million related to our Medicaid supplemental payment programs driven primarily by the new program in Nevada and the accrual of the Florida program, which began in the fourth quarter of 2023. To your specific question about the new program in Tennessee, that is with CMS for review, and we do not anticipate financial impact from that program in 2024. If you want to go to the public exchanges, for the quarter, let me just kind of give commercial volumes in general first and then we'll kind of break out it. Our equivalent admissions for managed care, including our health care exchange volumes, were up 12.5% in this quarter compared to the prior year quarter. If you take our managed care volumes without health care exchanges, they were up just short of 5% on equivalent admissions. For health care exchanges, we were up 46% over the prior year for the quarter.

Okay. Thanks a lot.

So, on the volume, I think as I mentioned and Mike alluded to there, our Medicare volumes were up by 6.5%. The volume was supported really across all payer categories. Clearly, the exchange and the enrollment over the last three years or so have become a bigger component of the business but still relatively small in comparison to the other payer classes. Nonetheless, we did see good volume across all payer classes, with Medicaid being the only category that was down.

And Medicaid was down 10% on equivalent admissions, mostly related to Medicaid redeterminations.

We talk about SWB; it was down quarter sequentially, and it's usually flat. Is that just driven by contract labor improvements? And if you can give us just any details on temporary labor percentage, total contract labor, things like that, that would be great.

Sure. Thanks, Ann. Contract labor was down 25.7% this quarter versus the prior year quarter. As I noted in my opening comments, contract labor as a percentage of revenue, I'm sorry, percentage of SWB was at 4.8% in the quarter. This compares to 6.8% in the second quarter of last year and almost 10% at the height of COVID in early 2022. We're continuing to see the improvements from all the work we're doing around recruiting and retention, and that's paying dividends in contract labor. If you think about wage inflation, it was stable and continues to run where we expected it to run. So also, we are pleased with our later results for the quarter.

And seasonally, we do tend to drop from the first quarter to the second quarter because some of the payroll taxes that we have to absorb in the first quarter are consumed by the end of the quarter or the early part of the second quarter, and that tends to improve a little bit of our metrics simply because of the timing of those tax payments.

Can you bridge us to the back half EBITDA raise for this year? What percent of the upside you're changing is coming from better volumes? What percent is coming from changes to pricing mix or acuity? And then, how is just coming from just better margin improvement coming from labor? And then finally, are there any changes to supplemental assumptions for the back half of the year versus original guidance?

So, we're obviously really pleased with our year-to-date performance. It sets our thinking about the back half of the year. On the top line, our volume and payer mix for the first six months of this year were better than our original expectations. Solid labor management, as we just talked about, including the contract labor declines, also contributed to our thinking around our results. As we move into the back half of the year, we believe most of these trends should continue. We anticipate volume growth to be in the 4% to 6% range for the year. We expect salary wages and benefits, supplies, and other operating expenses as a percent of revenue to run mostly where we did June year-to-date. Contract labor as a percentage of salary wages and benefits is projected to be in roughly the mid-4% range in the back half of 2024. We do expect professional fee expense growth to the prior year to moderate a bit more in the back half of 2024 as well. Specifically, on Medicaid supplemental payments, as you recall in our original guidance, we anticipated a headwind of $100 million to $200 million from the Medicaid supplemental programs. As we've noted previously, these programs are complex and have a lot of variability quarter-to-quarter, but given that we are now deeper into 2024 and have better visibility into the programs across our states, we now anticipate an approximate $100 million to $200 million tailwind in 2024 from Medicaid supplemental payment programs, most of which occurred in the first half of 2024.

Congratulations on a strong quarter. Sam, you mentioned that Medicaid redetermination has slightly impacted volumes, but the performance remains very good. I'm just wondering about your thoughts on the sustainability of this increased utilization trend.

Well, as Mike just mentioned, Brian, we do expect that these volume trends will continue throughout 2024. We have had for, including 2023, really solid volume growth. I think when we pull up and we look at volume for the Company and overall demand for our services, it starts with the markets that we serve. We are in markets, as we indicated at our Investor Day, that we think have solid characteristics that are going to support organic growth. That's the first thing. The second thing is the HCA network way. That is how we build our network and how we execute inside of that. Our inpatient bed capacity is up 2% year-over-year. When you look across all of our facilities, we've added a few hospitals in that as well, really small ones that are complementary. Our outpatient facilities are overall up 5%. So, our network development is a key part of our growth. We believe that our ability to grow our market share is crucial, and we have seen positive indicators that suggest our market share is increasing. Additionally, we are making significant investments in our identity, including our network, our workforce, and clinical technology for our physicians. We are focusing our capital to enhance our services and improve patient outcomes. This year, we plan to invest approximately $5.2 billion, which marks a significant increase from previous years, and we continue to identify internal opportunities for capital investment. While it is difficult to assess, we believe that having coverage—whether through exchanges, employers, or Medicare—leads to increased service purchases. Thus, the rise in coverage is contributing to heightened demand. We are in really uncharted territories for growth in demand in a normal environment. It's hard to know if there's a hangover from COVID, as we've mentioned in past calls and so forth, but we do believe the fundamental attributes of coverage help support demand growth. And when you start looking across, like we said earlier, the different payer classes, it's broad-based. It's broad-based across the different payers. It's broad-based across our services. Even obstetrics was up slightly in the quarter. We have seen just a sort of a lift across all aspects of our business. The diversification of HCA from market to market, as well as the diversification from service, allows us to participate in this demand growth, and we're pretty encouraged by what we see year-to-date and what we expect over the balance of this year.

Could you provide more details on the sources of acuity strength you are observing, particularly in relation to the two midnight rule investments and higher acuity capabilities? We have heard from some managed care organizations about increased acuity and the ongoing Medicaid business, as well as a potential pull-forward of acuity before members undergo redetermination. I'm interested in any insights you have regarding the growth in acuity.

Well, this is Sam. Let me speak to our core strategy. Our core strategy is to create sort of a one-stop capability within our systems. By that, I mean the ability to take care of a patient's need regardless of what their condition happens to be. Over time, we have built complexity in the services that we've offered. We've enhanced trauma programs, enhanced transplant programs, and enhanced neonatal services. We've opened up our infrastructure with our transfer centers with helicopters and ground transportation. We've interacted with the rural community in a way that supports healthcare needs there, which typically tends to be more acute care service requirements. All of that has been part and parcel toward our network strategy over the years. Again, we had broad-based service growth in trauma in the number of ambulance deliveries that occurred at our hospitals. Our cardiac care was up. Our cardiac surgery was up. Neonatal admissions were up. All of these components that I mentioned, which are essential to our network strategy, saw growth. So that has naturally lifted the case mix and the acuity of the patients we serve. The two midnight rule is actually dilutive when it comes to our case mix on the inpatient side. So, we jumped over the implications of the two midnight rules because those are lower acute patients deserving of being in an inpatient status, but nonetheless, their average equity by comparison. Our quarter suggests that the acuity and the complexity of the services that we offer is even more than what it reports out simply because of the dilutive effect of the two midnight rule.

Sam, wanted to get your view on one of the bigger questions we're all getting from investors heading into the election, which is the potential for exchange disruption should the enhanced subsidies be allowed to expire at the end of 2025. Has the Company run a scenario analysis of what happens to these volumes and hospital economics should those subsidies expire? And if not, maybe you could just share with us what you think happens to those patients in terms of coverage who might drop from the exchanges? Do they become uninsured? Do you think they move to other payer types? And then if I could just squeeze in a numbers question. Can you tell us what same-store ASC revenue growth was in the quarter?

On the exchanges, Justin, obviously, there's a lot to play out here politically between now and the end of the year. So, it's a little premature for us to forecast what's going to happen politically with respect to the exchanges. It's no secret that they are scheduled to expire at the end of 2025. Many of the participants are in states that we serve, obviously, you've all seen that in the data that's available. We don't have a great line of sight on which participants in the exchange at what level of subsidies and how that will play out. It's really difficult for us to know precisely what that is. We are starting to try to study as much as we can, and we're hopeful that in 2025, we'll have some sense of the policies that might be put forth and a better sense of the economics around the exposure if the subsidies go away. But at this point in time, it's way too early for us to make any judgments on that. We'll be as transparent as we possibly can be with you all around it once we have information that we feel we can support and share appropriately.

On same-store ASC revenue growth is about 8%.

Sam, you've talked a lot in recent quarters around the efficiencies and the throughput initiatives that you've had in the ER. Any numbers that you can share around any of those productivity gains that puts this in perspective? Maybe we see it on the back end with length of stay? And just if you could comment on the commercial growth in the ER this quarter.

Okay. Let me start with the commercial ER growth. Our commercial volumes in the emergency room grew almost 18%. So, really strong growth. Again, we are focused on throughput, patient satisfaction, and high clinical performance with what we call our ER revitalization program. Our ER revitalization program has produced positive results for us. Our throughput, let's start with time to see a patient, is down two minutes. That didn't sound like that much. Well, we're moving from 11 to 9 minutes. That's the starting point. Our length of stay for patients who have been discharged is down about 15% to 20% to around 160 minutes or something in that zone. Again, throughput, getting the patient through the systems, communicating with them effectively, and then getting them out when they're ready to be out. For those patients who are admitted, we've also improved the hold time in the emergency room, so we can get them up to a floor and in a proper setting for care. That has also improved markedly on a year-over-year basis. We have room to go. We're continuing to invest in our leadership development. We're continuing to invest in technology. We put our care transformation and innovation team inside of our ER processes to help them think about different approaches. Our patient satisfaction has improved in our emergency room. I want to say over 8 out of 10 patients would highly recommend or recommend an HCA emergency room. Additionally, we're adding capacity. We've added capacity on our hospital campuses, but we have also added capacity off campus to really meet the needs of different communities, and that's been part of our growth as well. We continue to invest in both aspects from a supply standpoint. We're also investing heavily in our process standpoint to ensure that we're delivering the services that our communities need and that our patients deserve. I'm really proud of the effort that our teams have put forth.

One clarification and a question. First, can you just give us the exchange admissions as a percentage of total in the quarter? And then on the question, outpatient surgeries were down about 2%. Can you elaborate on some of the trends you're seeing there? Maybe break that out between hospital outpatient and ASC volumes?

Yes. So, on the exchange volumes, they are right at 7% of admissions and ER visits as well for exchange as a percent of total. What was the second question?

We saw a 2% decrease in outpatient surgery during the quarter, but this is not based on same-store data. We experienced just over a 2% decline in same-store operations and a bit more than a 1% drop in ASCs, which averaged out to the 2% we reported. This decline is primarily linked to Medicaid and uninsured patients. Nevertheless, our overall revenue growth in both our ASC and hospital outpatient surgery platforms increased, and profitability within this segment improved as well. Although we noted a decrease in our volume metric, it doesn't significantly impact our business.

I would like to hear if you have updated your views on core wage inflation as part of this guidance revision. I'm curious if that factor is possibly related to the higher volumes you are staffing for. Additionally, it would be helpful to know if there are any impacts from M&A on the guidance regarding revenue and EBITDA.

If you look at wage inflation, when we came into this year, we were thinking that 2.5% to 3% range, and that stays consistent as we think about where we are here and how we're going to kind of close to the back half of the year. So, thinking wage inflation will be fairly steady.

And then there's one on M&A.

So, there were some questions on M&A. Let me just run through that. You have $400 million of revenue in new stores. About $250 million of that is from Valesco. The rest are from the acquisitions in Texas; you heard us talk about the Wise Healthcare System acquisition and a couple of others. That's the revenue side of that. It was dilutive to earnings, though, and about a 1% negative impact on EBITDA for the quarter. The M&A trends don't really impact or did not really impact our year-over-year EBITDA growth in any material way.

I was hoping to just circle back on the Medicaid supplemental payments. And maybe if you can just sort of talk about how your Medicaid margins have evolved from maybe where they were a couple of years ago to where they are currently, inclusive of the Medicaid supplemental payments. I know that you had mentioned how this is really just trying to get the business still on Medicaid back closer to breakeven or maybe not even there yet. So helpful if you could sort of walk us through that? And then just looking out to the elections, there is a level of investor uncertainty around the sustainability of Medicaid supplemental payments if there was a switch in the White House, although I do think it's notable that we do see many of the states that are sponsoring these payments are from red states. So, it feels like these payments slightly would be quite sustainable. But there is a lot of investor uncertainty around this topic. We certainly appreciate your thinking on that.

Yes, thank you. I'll address the second question first. We do see strong sustainability in the Medicaid supplemental payment programs. As you pointed out, these programs have historically been well-supported in both red and blue states. Two of our largest programs are in Texas and Florida, which illustrates this point. The new rule introduced earlier this year regarding sustainable Medicaid supplemental programs has been positive and beneficial for the provider industry. If we look at historical margins, it's true that supplemental payments are essential to Medicaid, and they were significantly below the cost of caring for Medicaid patients in the past. However, over recent years, those margins have improved, and more states have added or enhanced their programs. Yet, as we look toward 2024 and consider the historical Medicaid reimbursement along with supplemental payments, it is still considerably below the cost of caring for those patients.

Just wanted to ask on CapEx. It sounds like you're maintaining your outlook there, but just in context of the higher 2024 revenue and EBITDA outlook. I just, I guess, curious if there's anything to call out on the CapEx side. And apologies if I missed this, but it sounds like maybe you are expecting to use the excess free cash flow from the guide raise just for share repurchase, or how should we think about that?

We are not really revising our CapEx. As we started the year, we talked about $5.1 billion to $5.2 billion. We think it's still going to generally be in that same range. As noted in our comments, we do expect based on the improved outlook and the updated guidance that we're going to spend about $6 billion in 2024 on share repurchase. So, the bulk of the increase from the improved results would be going towards share repurchase.

Let me add, Mike, if I may, it's Sam. It's important to understand that we operate on an inpatient occupancy level in the low to mid-70s, even in the second quarter, which is in addition to the fact that we added 2% inpatient bed capacity, as I mentioned. Our inpatient occupancy continues to grow, reflecting the acuity of our patients, reflecting the overall demand and reflecting the market share gains that we believe we're experiencing. The second piece is our ambulatory network development. Again, we have about 2,600 outpatient facilities and clinics across the Company, up 5% from where it was last year. Those are a component of our capital spending as well. We will continue to look for opportunities from one market to the other to build out a network that serves our patients as we need to serve them. The third piece is infrastructure. We are in an infrastructure business; it requires us to have facilities that have the appropriate environment for our patients. We have to upgrade basic elements of those facilities. A lot of that is maintenance. Half of our capital goes towards maintenance to keep our facilities where they need to be. What we're seeing today is that the community is indeed demanding higher complexity of care for patients across the board, and we have to respond to that. So, a lot of what we're seeing is spend to meet that demand.

Let me clarify real quick. I said $5.1 billion to $5.2 billion. It's actually $5.1 billion to $5.3 billion in capital spending for 2024.

It seems you believe that the volume and demand establish a foundation for future growth. Could you provide some insights regarding the margins? Is this perspective on the base appropriate as we consider next year? Are there any specific factors to highlight? I understand that if volume exceeds expectations, it might create unexpected margin leverage, which could impact the situation you previously mentioned regarding some payments. Should we be aware of any significant timing challenges from this year that could affect next year's margins and EBITDA sustainability? Is this a solid basis for projecting growth next year?

We aren't going — Kevin, this is Sam — to speak to 2025. I will tell you that we do not have any unusual event thus far through the first six months this year. This is core operations, as Mike said, slightly affected by the Medicaid supplemental programs. So as a core operational level of performance, it's really quite plain by comparison to some of the choppiness that naturally occurs with COVID, the supplemental payment timings and so forth, with some of the challenges we experienced last year with just the inheritance of Valesco. When we look at the first six months and we think about the balance of the year, this is really solid operational performance, supported by strong volume and not really unusual items benefiting or dragging the business in any material right. That's how I'd answer that question.

Just want to go back to labor for a second. Obviously, impressive results. Is there anything particular in recent achievements driving these results, maybe past throughput and length of stay reduction and maybe how to think about that carrying forward over the next few quarters? And then just there are some potential M&A larger deals in the market, both on the hospital and the ambulatory side. Understandly, end market tends to be where you focus. But can you maybe just remind us of the parameters that you would need to entertain maybe a more larger market or national expansion?

Yes. Labor has been the main factor driving our performance in the first half of the year compared to last year, primarily due to a reduction in contract labor. This improvement is a result of our ongoing efforts in recruitment and retention over the past few years. Our initiatives, such as partnering with the Galen School of Nursing, have enhanced the supply of nursing staff in our markets, which has been extremely advantageous. Currently, contract labor accounts for 4.8% of salary wages and benefits. Moving forward, we expect to see further improvements, with projections suggesting we will be in the mid-4 range for the latter half of the year. While we have already made significant progress from the peak contract labor levels during COVID, future enhancements will be more incremental as we continue to focus on recruiting and retaining staff. Productivity remains strong, and wage inflation has stabilized as we transition from COVID into 2024. These are the key factors we are considering as we look ahead to the second half of the year.

And Mike, let me just put a wraparound that. Our focus now is on finding ways to help our employees succeed even more at what they do. We invest in the education of our existing workforce just as much as we're investing in education and new nurses. We're improving our processes around supporting our caregivers so they can deliver better care. We have a number of initiatives that are connected to our nursing operations that really make sure that we have resources and support for our caregivers on a day-in and day-out basis. We are investing heavily in our leadership because good leaders produce good outcomes for our patients and good outcomes for the organization. Those things are wraparounds to what Mike just alluded to. With respect to M&A, we have added to our platform this year with some tuck-in acquisitions from one market to the other. In Texas, as Mike alluded to, we added several hospitals to our North Texas market, small but very complementary. We're starting to see good results out of them. In Houston, as an example, we added an outpatient business to our network there. That has produced a very good outcome. We are built to be bigger. We know that, and we have the balance sheet to support that. We're very selective about ensuring that an acquisition fits the model and can produce the returns that we expect from acquisitions. Will we enter new markets? Hopefully, yes, but those opportunities haven't necessarily presented themselves. I don't know that we'll deviate from our model. Our model is more centered on making our system — our local system work better for the community, work better for our patients, and work better for other stakeholders that are connected to it. We obviously could do that, but we don't think that's the best answer for the Company. That's been part of what we define as the durability of HCA Healthcare, staying true to the model in ways that produce a really good outcome for our stakeholders. It's possible that something will cause us to deviate from that, but we haven't really seen it up to this point. Our focus is on investing back in our business, doing selective strategic acquisitions that complement our networks where we can and really advancing our position in these great markets that we serve.

And one more comment on labor. The other thing that was very helpful for us is this 2% reduction in length of stay. If you think about how did we service almost 6% growth in inpatient volume on the admission side, 2% reduction length of stay. Sam mentioned this; we had a percent increase in our bed count from our capital investment program and then our occupancy levels were up 2%. But that 2% drop in length of stay and the ER efficiency that Sam mentioned earlier also support our labor costs and the efficiency in the way we're managing our labor. I wanted to add that as well.

Great job. Just curious, a question we're getting is, if you look at the back half, do you happen to have the DPP compare of '23 versus '24 in your back half?

Here's what I would say about the guidance on the back half year. We talked about when we came this year that we thought we would have a headwind of $100 million to $200 million for Medicaid supplemental payment programs. As we've gotten deeper into this year, we're now changing that or updating that to a $100 million to $200 million tailwind. If you think about that flip of $200 million to $400 million, I would tell you that much of that already occurred in the first half of '24. The back half of '24 is expecting supplemental payment programs will look pretty similar to what we had in the back half of 2023.

Could you provide the year-over-year contribution of M&A to EBITDA? It appears that M&A has been somewhat modest in your cash flows, yet it seems larger in your table. Also, was the impact of M&A fully included in your guidance for 2024?

It is. As I said earlier, if I think about M&A or another way to think of that is kind of new stores. It was — for the second quarter, it was about a 1% dilution to EBITDA for the quarter in terms of the impact from M&A activity. That includes, by the way, Valesco. I would note that Valesco moves into same-store in 2025, and you’ll see us kind of stop talking about Valesco next year. That M&A was not a material impact related to our earnings for the quarter.

And Mike, as it moves through the last half of the year, it gets slightly better. We're hopeful that by the end of the fourth quarter, it's not dilutive.

Just getting back to the exchanges. I heard 7% of admissions now are coming from patients with ACA exchange coverage. What does that translate into revenues? And should we assume that those patients carry margins that are typical of the broader commercial population?

What we typically say about our health care exchange payer category is that it's our second-best payer. It's below commercial from a reimbursement level, and above Medicare. It's in between those. On 7% of admissions, if you look at revenue, something like 9% of revenues.

Can you give us some clarity if the commercial outpatient surgeries that were related to holidays in 1Q were rebooked? Taking a step back, if I look at outpatient surgical trends, the first half of last year was kind of mid-single-digit. Redetermination started and it dropped down to low single digits. Now it's a negative 2% for the first half of this year. Is that like the full change from the mid-single-digit first half last year to now be negative too, all related to Medicaid? Should we start to see that fall off in the back half of this year then as we start to anniversary some of the impacts?

Again, the volume declines on outpatient surgery are associated with Medicaid declines in that category as well as uninsured self-pay categories. Both of those categories explained year-to-date pretty much 100% of volume declines. There’s a thesis inside of our company, it’s not proven yet, that patients who migrated from Medicaid into the exchanges through the redetermination process maybe are in a different seasonality category with respect to when they access services. That's a theory we have. We'll have to see how that plays out as we move through the balance of the year.

We're about one year into the redetermination process in most of our states. Remember from last year, it really started gaining speed towards the end of last year. I don't think you'll sunset or anniversary you're into the full Medicaid year-over-year comparison period until you get closer to the end of the year.

Ellie, thank you so much for your help today, and thanks to everyone for joining our call. We hope you have a great week and a successful earnings season. I'm around this afternoon if I can answer any additional questions you might have. Thank you.