HCA 2Q15 Earnings Call Notes

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Health reform activity strong, about 40% of admissions were uninsured prior to ACA

“So let me touch briefly on healthcare reform. Health reform activity was strong for the quarter. In the second quarter, we saw approximately 11,600 same-facility exchange admissions as compared to the 5,600 we saw in the second quarter of last year. You recall we saw about 9,800 exchange admissions in the first quarter for an 18% increase quarter-to-quarter. And we believe this is largely due to the continuing new enrollment.

We saw approximately 44,700 same-facility exchange ER visits in the second quarter compared to 19,400 in the second quarter of 2014 and 36,900 in the first quarter of 2015. We have history on about 45% of our second quarter HIX volume. And based on our look back at previous coverage, we still estimate about 40% of these admissions were uninsured prior to health reform.”

We are seeing some acceleration in drug costs which are pressuring margins

“And then the third point is we are seeing some acceleration in drug costs, which have been in the press, it’s been in the political arena and so forth. We’re feeling that in our pharmaceutical cost trends somewhat and that puts some pressure on our margins in the second quarter.”

Medicaid expansion trends are beginning to normalize

“the slowing of uninsured declines is, we believe, largely attributable to the fact we didn’t really have any new states other than Indiana expand Medicaid. So these year-over-year trends are beginning to normalize and sunset on us. And by the way, it’s pretty much in line with our expectations and what we’re seeing in other areas of our volume.”

Do think there will be continued tailwinds from ACA

“I think next year’s performance will largely be attributable to the enrollment that we might see. We do think there’s some kind of key points of the law that may incentivize people to find enrollment. And so I do think there will continue to be some tailwinds in reform, at least for next year. Not so sure longer term we’ll have the visibility into that”

There are still penalties that will be enforced on individuals and employers

“I think you’ll see more material – that the penalty tax will materially increase next year for those who choose not to seek health insurance coverage. And that may drive more enrollment. And then you’re going to see employers with as few as 50 employees having to provide health insurance to their employees to avoid a penalty at the employer level. So there’s still some implementation pieces of reform that we’ve yet to see and so I want to reinforce that out into the market and not react too much to this second quarter because of the comp situation that we had last year.”

Inpatient surgeries are higher margin?

“I will say a number of our service line initiatives that are intended to drive more acuity, more complexity and round out the offerings within our market, will be centered on certain service lines that have a lot of inpatient surgeries. For example, trauma, cardiovascular, oncology, just to name a few, have a very significant inpatient surgical component which is a very high-margin service line for the company and a very significant service line with respect to rounding out the depth of our service line offerings.”

Priorities of Capex

“inpatient capacity, outpatient capacity, technology that’s needed for our nurses and physicians and then new facilities are really where we’re spending our money, which makes sense. That’s what we are when it comes to an organic growth-oriented company. So that’s where the capital expenditures are going.”

Over the last 9 years, increased EBITDA by $3B on roughly the same assets

“when you think about the company going private in 2006, we had $4.5 billion roughly of EBITDA and, again, basically the same assets today, nine years later. And if we hit our guidance near the top end of the range of $7.85 billion, you can see the solid growth in earnings through that time.”

We think the economy is a stronger driver of performance than ACA

“what we see and what we understand is a very significant improvement in overall macroeconomic factors within each of our markets. It’s hard for me to process that the exchange running, around 2% of our total business, versus the commercial, running around 28% to 30% of our total, that the exchange is driving the overall performance. It’s not big enough yet.”

We’ll be fine if insurers consolidate, but how does this affect smaller providers

“In most of our markets either we’re number one or number two in share in most of our markets, puts us in a good position to be relevant to all the payers going forward…my concern more over the longer term is how does this consolidation or possible consolidation affect smaller providers or systems in markets that may only operate in one or two markets.’

It could be a catalyst to allow for more consolidation among providers

“the question I would have is could this consolidation be a catalyst for further provider consolidation. And that’s yet to be known. We’ll see how that plays out. But it could be a catalyst to give us more opportunity for consolidation in the provider space.”