HCA Healthcare Inc (HCA) — Q3 2025 Earnings Call Transcript

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

All right. Good morning and thank you for joining the call. As reflected in our earnings release for the third quarter, the company produced strong results when compared to last year with 42% growth in diluted earnings per share as adjusted. Revenue increased by 9.6%, which was driven by broad-based volume growth, improved payer mix, more utilization of complex services, and additional revenue from Medicaid supplemental programs. We also translated this revenue growth into better margins with disciplined operations. As a result, you will see in this morning's release that we raised our guidance for the year to reflect this performance and our outlook for the fourth quarter. Our teams continue to execute our agenda at a high level across many operational measures, including quality and key stakeholder satisfaction. Outcomes were better year-over-year. I want to thank our 300,000 HCA colleagues who once again demonstrated excellence in what they do. As a team, we remain disciplined in our efforts to improve care for our patients by increasing access, investing in advanced digital tools and training our people. These investments allow us to enhance capacity, improve service offerings, and gain efficiency. Making it easier for us to provide better services to our patients, physicians, and the communities we serve. Typically, on our third-quarter earnings call, we provide some preliminary perspectives on the upcoming year. Before I get to these, I want to comment on the enhanced premium tax credits. We continue to advocate strongly for the extension of this program for the 24 million Americans who depend on it for health insurance coverage. Today, we believe there is greater recognition by legislators of the negative impact this issue will have on families, small businesses, and individuals than earlier in the year. At this point, however, we still do not know how this policy will play out. Because of the fluid nature of the federal policy environment, we will limit our early thoughts for 2026 to our views on demand and the cost environment. We continue to see solid demand across our markets for health care services and believe volumes will be within our long-term 2% to 3% growth range. As it pertains to operating costs, we expect mostly stable trends consistent with the past couple of years. As usual, there are some pressures in certain areas, but we believe our resiliency plan should provide some relief. It is important to note that we are still early in next year's planning process, and these preliminary views may change before our fourth quarter's earnings call when we will provide you with our guidance for 2026. So let me close with this. As we work to complete another successful year for HCA Healthcare, we believe the company is well-positioned to sustain high levels of performance in the years to come. Organizationally, we have strengthened enterprise capabilities to execute at a higher level through our previously restructured management team and improved management systems. Competitively, our networks have enhanced service offerings for patients with more outpatient facilities, greater inpatient capacity, and improved operations. And financially, because of the increased cash flow and stronger balance sheet, we have the resources to invest more in our strategic agenda. With that, I will turn the call over to Mike for more information on the quarter and our updated guidance.

Thank you, Sam, and good morning. The company produced solid results during the third quarter. The demand for health care services was strong in the third quarter with same-facility equivalent admissions increasing 2.4% over the prior year. Our surgical volume growth also improved with the same-facility inpatient surgical volume of 1.4% and outpatient surgical volume up 1.1% in the third quarter over the prior year. Same-facility ER visits increased 1.3% in the quarter over the prior year. Commercial and Medicare ER visits combined increased 4.1% in the third quarter of 2025 compared to the prior year, whereas Medicaid and self-pay ER visits were both down compared to the prior year. We have also seen a slow start to the respiratory season in 2025, which is impacting the year-over-year growth rate in our admissions and ER visits by an estimated 50 and 70 basis points, respectively. Our net revenue per equivalent admission growth in the quarter reflected strong payer mix, improved dispute resolution results, consistent case mix index, and increased Medicaid state supplemental payment revenues. Regarding payer mix during the quarter, same-facility total commercial equivalent admissions increased 3.7% over the prior year, with exchanges growing 8% and commercial, excluding exchanges, growing 2.4%. Medicare increased 3.4%, Medicaid increased 1.4%, and self-pay declined 6%. Regarding Medicaid supplemental payment programs, as we've said in the past, these programs are complex, variable in timing, and do not fully cover our cost to treat Medicaid patients. Considering these programs in isolation, the revenue growth from these programs drove about half of the overall increase in net revenue per equivalent admission in the third quarter compared to the prior year. And we saw an approximate $240 million increase in net benefit to adjusted EBITDA from these programs in the third quarter of 2025 compared to the prior year. This increase was largely driven by Tennessee program payments and the approvals of grandfathered applications in Kansas and Texas. We were pleased with our operating leverage and expense management in the quarter. The improvement in adjusted EBITDA margin was driven primarily by good performance in labor and supplies. As expected, we did see contract labor expenses flat in the prior year. Same-facility contract labor was basically flat in the third quarter of 2025 compared to the prior year and represented 4.2% of total labor costs in the third quarter of 2025. The increase in other operating expenses as a percentage of revenue in the quarter was driven primarily by increased expenses related to Medicaid state supplemental payments and, to a lesser extent, professional fees compared to the prior year. Our work progressed to both enhance and accelerate our resiliency program as we prepare for the future. Through these efforts, we continue to identify a robust set of opportunities across revenue and cost to improve efficiencies. The growth in our adjusted EBITDA in the third quarter reflects our strong operating performance and the increase in supplemental payments. We would also note the estimated $50 million impact from the hurricanes in the third quarter of 2024. Moving to capital allocation. We continue to execute our strategy of allocating capital for long-term value creation. Cash flow from operations was $4.4 billion in the quarter with $1.3 billion in capital expenditures, $2.5 billion in share repurchases, and $166 million in dividends. Year-to-date, we've been able to defer approximately $1.3 billion in federal income tax payments to the fourth quarter due to the IRS providing relief to Tennessee taxpayers in the aftermath of severe weather in early April. Our debt to adjusted EBITDA leverage remained in the lower half of our stated guidance range, and we believe our balance sheet is strong and well-positioned for the future. So with that, let me speak to our 2025 guidance. As noted in our release this morning, we are updating the full-year guidance as follows: we expect revenues to range between $75 billion and $76.5 billion. We expect net income attributable to HCA Healthcare to range between $6.50 billion and $6.72 billion. We expect adjusted EBITDA to range between $15.25 billion and $15.65 billion. We expect diluted earnings per share to range between $27 and $28. We expect capital spending to be approximately $5 billion. We now anticipate our supplemental payment full-year net benefit to be $250 million to $350 million favorable comparing full-year 2025 versus 2024. This guidance update does not include any potential impact in 2025 from any additional approvals of grandfathered applications under the Act. And at the midpoint, this guidance assumes a $120 million decline in net benefit from Medicaid state supplemental payments in the fourth quarter of 2025 compared to the prior year due to one-time payments in the year. Consistent with our comments on the second quarter call, we believe our hurricane-impacted markets will produce approximately $100 million in adjusted EBITDA growth in full-year 2025 compared to 2024. Year-to-date, adjusted EBITDA in our hurricane markets is modestly below prior year, and we are anticipating all of this growth will occur in the fourth quarter. We are increasing our earnings guidance at the midpoint of adjusted EBITDA by $450 million. This represents an expected $250 million increase in net benefit from the state supplemental payment programs and a $200 million increase from operational performance. With that, I will turn the call over to Frank for questions.

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

Great. Thank you for the detailed information on the DPP programs. Can you remind us which states still have pending approvals for their grandfather programs? Also, any estimates on the potential incremental benefits would be appreciated.

So as you think about kind of the states, there are several that have applied under the grandfathering programs, we've mentioned Florida before, and certainly that one is under review. There are a few others as well. I might mention Georgia and Virginia as well being in that list. We do not expect that CMS will be approving these additional grandfathering programs during the shutdown. I would say that we have reports that indicate though that the reviews between CMS and these states are active and those reviews continue during the shutdown. I might also mention that we were encouraged, coming up to the shutdown, that several states had approvals coming into the shutdown. So I think we're in a pretty good environment. We are, at this point, not going to size those potential applications until they get approved. But I did note in my comments, and I'll note again that the updated guidance that we gave you just now on this call does not include any potential impact from the applications that are still pending review with CMS.

I would like to inquire about the public exchanges. There has been some discussion, and some managed care companies are expecting an increase in volumes for elective procedures in the fourth quarter. This is likely due to people's concerns about losing coverage or facing higher co-pays and deductibles. Are you noticing any early scheduling for elective surgeries or any other signs that might suggest this trend for the fourth quarter? Additionally, if we experience disruptions during the traditional open enrollment period and people are able to re-enroll in the special enrollment period, will your emergency room be equipped to assist them in getting re-enrolled if that option is available to them after the open enrollment?

If you consider EPTCs and the situation with these exchanges, I want to highlight a few points. At this moment, we are not fully assessing the potential impact because the situation is still changing. An enrollment period will begin in a couple of weeks. By the time we hold our fourth quarter call, we will have much more information regarding what outcomes may arise from government actions, the possibility of extensions, and the specifics of any extensions if they occur. Additionally, timing is important, particularly concerning whether there will be a special enrollment period at the end. It’s challenging to estimate the potential impact until we approach the fourth quarter call, at which point we will aim to clarify. Our financial counseling teams through Parallon revenue cycle are equipped to assist patients with Medicaid and exchange-related inquiries. While we cannot offer on-site support, we are committed to connecting them with the right resources to help them navigate the process. We have emphasized throughout the year our efforts to enhance our resources with Parallon and across the organization to support patients in understanding coverage options for both Medicaid and exchanges. We feel confident in our preparations in this area and will do our utmost to assist our patients during this enrollment season.

The quarter was a pretty strong beat even if we exclude the supplemental payments in the 3Q, but guidance didn't go up a whole lot past the beat you guys did this quarter, at least at the midpoint of the range. Can you give us any color on how we should think about the range of guidance implied on the fourth quarter, if we just steer towards one or the other? And also, if you can help provide a bridge from 3Q into 4Q as we think about the moving parts between hurricanes and supplemental payments.

When I think about fourth quarter growth rate, there are really 2 main considerations that I would think about and then the third being just operations. But the first would be the hurricane impact for sure. And then the second would be the decline in state supplemental payments that I noted in my comments when you compare the fourth quarter of '25 to the prior year. When we take those 2 factors into consideration, we believe the implied growth rate is still solid for the fourth quarter in the kind of high single digits range, maybe 7% roughly. And then the other note I would give you, when you take those same considerations into account, our sequential growth from third quarter to fourth quarter is in line with our past trends. And so we feel that our guidance for the fourth quarter is solid. I might also just note that our range in our guidance is intended to really cover a range of outcomes, including at the higher end of the range, even stronger performance as well. So that's how we're viewing the fourth quarter.

I have a quick follow-up regarding the SDP guidance. Can you clarify how much was recognized in the third quarter and how much is included in the guidance for Tennessee? Also, did you recognize anything in the quarter or in guidance related to Texas, considering it was approved later in the quarter? I'm interested in knowing if you are including any of that in your figures.

Thanks, Ben. So Tennessee was the largest driver of our net benefit in the third quarter. We did receive cash in the third quarter of 2025, and we began accruing this program. So that's the update on Tennessee. Texas, as you know, we did receive approval of the grandfathered application. As this approval was really an enhancement to an existing program, this was really accrued just in our normal manner for the third quarter of 2025. I might note being, though, that this grandfathered application really only had 1 month of impact for the third quarter. The third one that we mentioned on call is Kansas, where we also received approval of the grandfathered application, we received caps for this program in the third quarter of 2025 as well. This is a calendar-year program, so 9 months of impact recorded in the third quarter of '25. And Ben, let me just mention, like always with these programs, we always talk about that they're complex and variable. There were another number of pluses and minuses that you see across our portfolio of programs. So these 3 states with those pluses and minuses of all the other programs really led to the aggregate of the $240 million net benefit. It's always important to keep that in mind.

Congratulations on the quarter. Mike, I appreciate you emphasizing the success you've had with expense management, labor, and supplies. I'm curious about the costs of supplies, as you have managed to keep them fairly steady over the past few years. When do those contracts reset? Additionally, regarding your efforts to address Medicaid cuts starting in '28, when can we expect to see the results reflected in the P&L? I assume many of those initiatives will begin to have an impact well before '28.

On supplies, Brian, we have a robust ongoing effort with supplies that we've communicated multiple times in the past. I mean, certainly, through HealthTrust, a lot of effort in flight on our contract renewal cycles. We tend to run 2-year cycles, some contracts for as many as 3. And so those renewals flow as follows. And we spend a lot of effort in those contract negotiations, and that's certainly one component of our supply expense annual trends. The second component would be mix of technology. And so as you're aware, every year, there's new technology coming in. And then there's management of technologies that goes through its maturation cycle that's a big part of our overall management routines. The third part of our resiliency plan is our efforts to manage utilization. And so we have a very active resiliency plan. Supplies is one of those areas that we are continuing to both enhance and accelerate our resiliency plans focused on appropriate management of supplies and the utilization of supplies throughout the platform. As I think about bridging into the future, the other component that we're keeping a close watch on is our tariffs, where our HealthTrust team continues to work through a very diligent effort to manage the tariff risk. Both in terms of sourcing, the way that we negotiate with contracts, our vendor partners on contracts, and then also in terms of moving products and moving choices of products across countries of origin. So a lot of work in flight with supplies that I think you've seen not only help us manage supplies over the last several years, but we believe will continue to give us a very strong platform moving forward and our ability to manage supplies. You asked about resiliency. And really, we've had a long-standing resiliency effort in the company. As we've noted on the last couple of calls and noted again today, our work to both enhance and accelerate our resiliency plans continue as we prepare for the future. These are widespread across both our corporate platforms and our field platforms. I'm really proud of the entire team at HCA, helping us to find additional opportunities to drive efficiencies. We're doing this through benchmarking. We're doing this through a robust focus on digital tools. Sam talks often about digital transformation, and it certainly applies to our resiliency and efficiency efforts. It's a big part of what we're doing. And then third, we're focused on our shared service platforms, and the strength that they give us and the ability to expand their influence across the company is helpful as we continue to move forward. So a lot of good work going on with resiliency. And as we get into our fourth-quarter call, we will intend to provide additional comments about our resiliency effort when we give 2026 full-year guidance as well.

And Mike, let me add to resiliency. We think about resiliency as a whole. There is clearly a financial resiliency culture within HCA that Mike mentioned, which is not just event-driven but part of our culture. It is embedded within our disciplined thinking, resource allocation, and execution. Holistically, we also consider other aspects of resiliency across the organization. First is what we call organizational resiliency, which I touched on regarding our restructuring. We are now taking a more aggressive approach to develop our people, enhance the capabilities of our C-suites across our facilities, and prepare for succession planning. All of these factors contribute to having a durable organization. We have great people at HCA, and we want to enhance their skills through our development programs. We've asked our human resources department to invest more in building those capabilities. The second aspect of resiliency, beyond financial, is network resiliency. Our organization is advancing in the marketplace by adding more outpatient facilities, improving throughput within our facilities, and making targeted investments to strengthen our competitive position. We're also focused on operating at an exemplary level regarding quality, engagement, efficiency, and patient satisfaction, all essential elements that help us endure through various cycles. Our resiliency agenda is broad, spanning these three dimensions, and we believe it positions us strongly to navigate tailwinds, overcome headwinds, compete effectively, and deliver solid outcomes. We have a track record of doing this and are now enhancing it with technology and new capabilities within our shared service platform, as Mike mentioned, along with further developing our people.

Priela, let's take one more question. We're running up close to the end of the hour.

I appreciate that. So I wanted to ask about cash flow conversion. We've seen the ratio of EBITDA that converts to free cash flow sort of move from the 30% range into the 40s. And I think this year, you're on track to almost 50%. So maybe talk about the factors that are driving that? Is that a shift to outpatient? Is there an impact from the strong pricing, including the sub payments? And I guess, most importantly, do you think that's sustainable over the next couple of years?

There's 3 or 4 things I would note that are driving our strong cash flow from operations as we think about it. One certainly is just we've had really solid adjusted EBITDA growth. And that strong operational performance that we continue to highlight as we think about the strength of our revenue cycle operations with Parallon, we turn that revenue into cash. And so that's a piece of that. And you're seeing that in kind of our working capital management plans. We have a pretty robust working capital management strategic plan that includes not only net days in ARR but includes things like inventory levels, prepaid levels. And that work around working capital continues to assist us as we think about growing our cash flow. The other point, and I made this on the call, but it's important to note, is that year-to-date, we have been able to defer $1.3 billion of estimated federal income tax payments to the fourth quarter. And so keep that in mind as well. But when I think about the long term, this idea of clearing out your revenue with cash and the strength of Parallon and our revenue cycle operations and the strength of the working capital management plans of the company, I think, puts us in good stead for continued strong management and performance around cash flow into the future.

And that is all the time we have for questions. I would like to turn it back to Mr. Frank Morgan for some closing remarks. Priela, thank you for your help today, and certainly, good luck for the rest of the earnings season. If anybody has any questions, we're around today. Give us a call. Thank you.