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HCA Holdings, Inc. (HCA)

March 12, 2013 2:30 pm ET

Executives

W. Mark Kimbrough - Vice President of Investor Relations

Victor L. Campbell - Senior Vice President

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

All right there we go. So before we introduce the team from HCA, who probably needs no introduction; they've been at our conference, probably longer than I have, now that I think about it. But first, we're going to go to some of the audience response questions. You guys have been seeing these all day. So hopefully, you get it. First one, hopefully, is obvious for these guys. Do you think health reform will be a positive for HCA in 2014, 1 being very negative, 2 being very positive and anywhere in between, go for it.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

We get immediate responses. There we go. So wow, interesting. There are a couple people still holding out for very negative. That's an interesting [indiscernible] .

W. Mark Kimbrough

Raise your hand, who's that?

Joshua R. Raskin - Barclays Capital, Research Division

Clearly haven't read our reports. Number two, second question is around contracting rates on exchanges. Do you think HCA be able to receive rates that are closer to commercial; #5 or all the way down, as well as Medicaid rates, which would be #1. Go for it.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

I was hoping Stan [ph] would push a button and could I see which one. But anyway, it looks like people leaning more towards the commercial or slightly below that, which sounds better. Number three, utilization trends in 2013. Do you think you'll see a significant increase, that's 1, all the way down to a significant decrease. Think about broad volume metrics for HCA, specifically this year. Go for it.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

So it looks like a certain bias, certainly a bias towards increase. Everyone's either in the no change to the increase side, and mostly in the not so significant, which makes sense. I think it's consistent with the second half.

All right, next question please. How would you like to see HCA deploy their capital in 2013? Would that be M&A, repurchases, dividends, repay some of the debt or invest in the core business; 1 through 5? Go for it.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Wow. Now there's certainly a lack of consensus on that one. That's interesting. So you guys got a lot of work to do, it looks like. You've got a bunch of stuff to do.

Next question. Do you think the company will grow earnings? We've been defining that as EPS all day. It's an easy one. Yes or no?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Wow, this is the first unanimous vote.

W. Mark Kimbrough

Thank you. We are happy with the results. Thank you very much.

Joshua R. Raskin - Barclays Capital, Research Division

Thanks for coming.

W. Mark Kimbrough

Vic will be at bar buy drinks.

Joshua R. Raskin - Barclays Capital, Research Division

It looks like Mark has done his job. Here we go. All right, next -- we got 2 more, I think. Do you own -- currently own shares in HCA? 1, yes, 2, no.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

They're all going to say yes because [indiscernible] .

W. Mark Kimbrough

There we go. Look at this.

Joshua R. Raskin - Barclays Capital, Research Division

[indiscernible] That is a split. All right. And then I guess let's get the sentiment question. Is your current bias more positive or negative or neutral, with a 2 in between?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Oh, so half of you don't own it, but only 40% of you think that it's not a good idea. Interesting. All right. Clearly we've got to them this, there's 40% of people that need to read my research.

So let's jump into it. I'll do very brief introductions. To my immediate right, Mark Kimbrough, who everyone knows coordinates everything with the Street, Investor Relations, and has been wearing that hat, and multiple other roles for a while, although certainly not as long as Vic Campbell, to his immediate right, too, has been with the company for, I'm going to guess, 30 ...

Victor L. Campbell

40.

Joshua R. Raskin - Barclays Capital, Research Division

40 years. I was thinking of 30. All right, 40 years, which is impressive. So he's got me in terms of ages of life -- years of life. And then all the way to my far right, Sam Hazen, who we'll call our guest of honor today. Sam is the President of Operations, basically runs all of the facilities. So you think of him as the, in charge of the largest portfolio of facilities in the country. I think Sam previously ran the Western operations, which was 60-some-odd hospitals before that, and I think started at Humana once upon a time, as some of my friends in Louisville are correct as well.

So I'm going to do some of the Q&A while we're here. And then we're going to Poinciana 3 to go through some of the audience questions.

Question-and-Answer Session

Joshua R. Raskin - Barclays Capital, Research Division

The one that I want to start with is quality. We have not softened up, in my opinion, about the differentiation around quality. When we went through the initiation process, one of the things that impressed us the most was that no matter what metric we looked at, whether it was readmittance or any of the broad-based outcomes, the data that we could get our hands on, HCA was at the top of the list. I'm assuming that's not an accident. Maybe you can talk to them about how did you get there? And then, more importantly, why is it important? How does this help the company from a financial perspective?

W. Mark Kimbrough

Well, I think, first of all, let me answer the second question. I mean, the purpose of the company is to take care of patients. That's what we're really there for. We recognize that we have a unique social possibility. We're a unique component of the infrastructure of a lot of these communities where we do business, where we have anywhere from 25% market share on average to 45% of the hospital services within a big metropolitan market. So we recognize the responsibility that comes with that. And the main responsibility is to create a safe environment, an effective environment for our patients. And so given that, what we try to figure out is how do we balance out the distributive nature of healthcare, with the scale of HCA, which we think is a huge advantage, not only for economies of scale, for strategic initiatives, but also for quality initiatives. But we're able to identify best practices that we see across the company, with processes within our hospital, within clinical practices, within our physicians, and put that to use on a broader scale. And I think that gives us a unique advantage in comparison to a lot of our competitors and so forth.

And so we have developed that approach to improving our quality metrics over the years, and you've seen it in some of the CMS scores that are published. You see it now in our trends with patient satisfaction. You see it with respect to other core quality metrics, whether it's mortality indicators or complication indicators and so forth. Readmissions is a small component of that. But fundamentally, we believe that if we have a clinically capable service line, whether it's women's services, cardiac services, emergency services, whatever the case may be, and couple that with efficiency and throughput, convenience for our physicians and so forth, it really creates a compelling platform for growing our top line. And so to compete in the business today, to compete in the business tomorrow, I mean, the quality viewpoint is going to get more and more scrutiny. And we think the company's well positioned to be able to deliver what we need to deliver in that particular area.

Joshua R. Raskin - Barclays Capital, Research Division

Is it too early to see in the market, actual contracts with the various payers, even at the federal or state level, and certainly on the commercial level, reimbursing you at differentiated rates for your outcomes?

W. Mark Kimbrough

I don't know that we necessarily get differentiated rates vis-à-vis our competition in the marketplace. We don't know exactly what our competitors get. We do have a number of contracts where we have provisions for quality, performance and other satisfaction level performances and so forth. And we tend to accomplish those bonuses, if you will, in our contracts, our commercial contract. I think we're pretty well positioned within the value-based purchasing component of the CMS program to do reasonably well, as well. But to say that we get a differentiated rate because of our quality, I'm not sure I could speak to that.

Joshua R. Raskin - Barclays Capital, Research Division

Not yet. Not yet, maybe. Maybe taking step back, another thing we noticed about HCA, and we sort of look back to 2007, and I'm sure of this trend probably persisted before that. But the last 6 years, your admissions as well as your adjusted admission trends are above your peer group, and a noticeable amount. And so, maybe if you sort of think about that, what have been the key drivers? What's been the main focus area for HCA that's allowed for that volume growth, which ultimately manifests on higher margins for size as well?

W. Mark Kimbrough

Sure. I think first and foremost, for HCA, it's -- we do have a unique portfolio of markets where we do business. If you look at the location of our facilities, you'll see that they're generally in pretty good demographic areas across the country, mostly in the Southeast, Southwest, and then at Western markets where, typically speaking, the economies and the demographic growth patterns have been slightly better than maybe U.S. averages. So I think that's a starting point for our growth platform. The second thing that I think we've been able to do -- and again, I can't underestimate or overstate this situation for the company. Our scale gives us incredible insight into ideas and strategies for executing a growth initiative. And over the past few years, I think we've gotten much better at finding great approaches to growing business in one particular market, and then applying it more broadly across the company. And that is a unique asset of HCA. And that intellectual capital, as I like to call it, gives us some insight into unique strategies, unique initiatives and so forth that will deliver above-average growth and growth that tends to deliver market share gains for the company. But fundamental to our growth strategy is, within our local markets, we feel we have to have scale. And our scale gives us the ability to internalize the patient flow across the continuum, where we are able to offer a complete array of services, and in most instances, keep patients within our system of care. And so if we are able to create enough access for care in these metropolitan areas, where people can access the HCA system, and then we can keep them in the system throughout the continuum, we've been able to generate, what I call, internal growth through that approach. And so one of the key aspects of what we've been doing is establishing greater numbers of access points across all of our markets, so that we have a broader array of entry points into our system. And that's come in the form of outpatient services, physician practice acquisitions or placement, freestanding emergency room, other initiatives to really create an opportunity for a patient to access our system. And then, I think another key component of our success on the growth side has been that we have tried to define a new market. When we were in a period of time where demand for healthcare was not growing, it was incumbent upon us to come up some new ways to find growth. And one of the things that we identified as an opportunity was expanding our market into what we call the rural outreach market. Because in HCA's market, there's a lot of business that comes from the rural setting into these major metropolitan areas. We had not been intentional enough in trying to penetrate that market. And the company has made significant investment in infrastructure, other capabilities, affiliations, relationships, where a small hospital is affiliated clinically with a large HCA hospital, and we support their programs and so forth. And our goal is to get the downstream referrals of the tertiary business and again, we have gained ground with that particular area. So it's a combination of a lot of things. There's not one initiative that has necessarily delivered our growth. And then the last thing I would say is our emergency services strategy has been tremendously powerful for the company where we've seen large gains in market share through operational improvement, program development, new relationships and so forth. But it's a combination of things that I think ultimately deliver that. And the company has gained, we think, some pretty substantial market share over the past few years, and we're optimistic with our platform as we move forward.

Victor L. Campbell

I would add one more thing. I can't sit here and be too quiet. Number one, shorted me a year, I've been there 41 now.

W. Mark Kimbrough

I hate to admit that.

Joshua R. Raskin - Barclays Capital, Research Division

I was trying to be nice.

Victor L. Campbell

I appreciate it. A lot. I think our capital investment strategy is different. Everyone invests a lot of capital. But I look back at years, HCA, one time, we had 400 hospitals, not 160. And there were periods of time where many of our hospitals felt like they weren't getting the right amount of capital. And every hospital needs capital. I mean there isn't a hospital in this country that's saying, "I don't have to have capital." And so we had -- we handled hospitals all over the country, we might have one in, wherever, Wyoming, or one here. They were scattered. In the early years of this business, '60s, '70s, on into the '80s, it really, there was still a good strategy. Bigger you were, you got some economies of scale by being everywhere. But then, over time, we determined we needed to really focus on markets. Let's get focused. We've got 160 hospitals, focused in market. The hospitals, we found ourselves wrestling. Well, do we put this capital in this one-off market? Or do we put it in Denver, where it's really going to generate? Or Dallas, or whatever? So what we decided over time, through spin-offs, through sales of assets, through whatever, to get focused. And now we've got the right, we got places that really, we want to put capital in. Sam and his team do an incredible job of getting that capital in the right places, get the best returns. And even when I look back, I've been through 2 LBOs with this company. And the first time we did our LBO, 1989 to '92, we actually entered into the LBO and one of the things Tommy Frist, who's like a brother, said, "We hurt ourselves a little bit, because we had to stretch, and we had to set some capital expenditure limits in the early years." And we underinvested for a couple years. So that 3-year LBO. It didn't hurt as much in the year you're underinvested, but it did a couple years down the road. The night we sat down with KKR and Bain, to talk about bringing them in as partners through our last LBO, the first thing that we put on the table was our capital plan. And we said, "We are going to invest this amount of money in our business, and it's going to be there, and it's probably going to go up. And if you have an issue with that, then this is the wrong management team. You let us know now. We'll look for another partner, and we'll stay public. And they bought in. They stuck with us. They've been great partners through that. And again, our capital's going to be $2 billion this year, rather than $1.8 billion last year. So I think that is hugely critical, and it's not just thrown out there. He and his team know where to put it.

Joshua R. Raskin - Barclays Capital, Research Division

That is a great point. I think one of the things that, despite being the largest of the hospital operators in the country, you guys have been relatively nimble in terms of divestitures, right? You typically see at some of your peers. As you think about the changing landscape of these markets though, historically it's been avoid heavy Medicaid markets, because that's a bad market, et cetera. Health reform is going to provide a significant change to that. So do you guys think that there is specific geographies that you should be paying more attention to? And if so, you guys have always talked about maintaining that significant scale at the local level. Would it almost have to be done through an M&A-type of arrangement? Or do you think there's other opportunities, other ways to participate in markets, maybe not even starting with acute care or something like that?

W. Mark Kimbrough

Well, I think you still need scale at a local level to compete over the long term. I think it's difficult, using the capital example, to rationalize capital if you just have one institution, and it's not positioned necessarily with the services or the location to really sustain itself. And so I think, from that standpoint, our approach is still to have local scale in a particular market. And where we have it, if we can add to it, that's obviously something we're inclined to do, and have done over the past few years. There's not as many opportunities in our markets because they're a fairly consolidated. And so it's forced us to have to look for other ways to reposition our investment in those markets and in many instances, we have 4 hospitals today that are being built inside of existing HCA markets to expand their footprint. I do think potentially healthcare reform creates a new opportunity to evaluate hospitals in our markets that has maybe been in troubled demographics, previously. It presents possible new opportunities for the company, so there could be situations where we do score hospitals differently down the road, if the performance of those hospitals change dramatically from the healthcare reform dynamic. But I don't think it will change our core approach to how we think about the overall network needs and position that it takes for a system to compete and compete effectively in a marketplace.

Joshua R. Raskin - Barclays Capital, Research Division

Can you talk a little about Parallon, something about sort of '14 and '15 and the onset of reform? There are some that are arguing the rising tide is going to lift a lot of ships and they may not need the, to accelerate their sort of management, the revenue cycle management businesses, et cetera and there may be a little less demand. On the other hand, there's effectively, their Medicare coverage is starting October 1 of this year, and I think you could also make the argument that the ability to manage a revenue cycle is going to be significantly more important. So I'm curious, what are your customers, your hospital customers, coming to you and saying? And do you think Parallon is going to see an acceleration growth over the next couple of years? Or do you think there's so much other stuff going on that people are worried about Parallon? Maybe there's a pause on some of the activity?

W. Mark Kimbrough

Well, we believe Parallon is a unique offering. It's a unique offering in that it has the scale to drive efficiencies for our company, but at the same time, those efficiencies can be delivered to other non-HCA entities as well. The second thing is, Parallon performs at a very high level with its objectives on turning accounts receivables on revenue capture and Medicare compliance. And so those performance levels are unique. Also, we believe, it can deliver value to non-HCA customers. I mean every hospital is different. Their needs are different. Their boards are different. Their policies and so forth are different. And I can't sit here and say what kind of facility will want to latch on to Parallon's services. But we do believe the growing complication and that growing difficulties in capturing all the revenue that a hospital deserves and earns and the services that it delivers, that Parallon can be a unique solution on them for that. And so we're excited about its prospects. We're excited about the developments in the pipeline that are going on inside of the company, but how that transpires over the next 2 years is really difficult to say, but we think it's got a bright future for the company.

Joshua R. Raskin - Barclays Capital, Research Division

Okay, that's fair. You guys have talked about, we've talked several times about strong local market share. As you think about reimbursement rates and maybe specifically around the commercial insurers, are there still big differences between the leading market share facility or system within a geography, relative to the others? Do you think that, that's a -- as big a spread as it was historically? Or do you think that payers are trying to kind of even some of that out?

W. Mark Kimbrough

Well, as I said minute ago, I don't know, precisely what our competitors are getting from the managed care company. My sense is that HCA's position within the market is competitive. And by that, I mean, that maybe in some instances, we don't get as much as some of our competitors, in other instances, we may get slightly more. But I don't hear of too many instances where it appears that we're at a major premium or major deficit in any particular market, otherwise we'd hear it from our physicians or we would hear it from the payers in our negotiations. We know there are some instances where those situations are understood to be opportunities or potential problems. But for the most part, we think our overall pricing is very competitive. To date, we have all of 2013 pretty much under contract. We probably have about 55% to 60% of our contract and our revenue in 2014 under contract, and then at maybe a 1/3 of 2015, generally consistent pricing terms, generally consistent network terms and other operational terms. But it's hard for us to know exactly what our competitors are getting, and how they're doing it, but we would hear it in negotiations. I'd think if there were major issues.

Joshua R. Raskin - Barclays Capital, Research Division

Okay, that's fair. What about narrow networks? It seems to be buzz down here. I'm not surprised. And some on the exchanges, et cetera. But even off the exchanges, is that good for the hospitals that need to be in these networks -- or I should say, that the plans need it, to have in their networks, is that a share aggregation method for you guys?

W. Mark Kimbrough

Potentially, it could to drive market share. I think one has to be pretty careful with that strategy because the last thing you want to do is create a downward spiral on the commercial book, in the face of a government reimbursement environment that is, at best, flat. And in most cases, it's been down over the past few years. So I think you got to be pretty cognizant of the fact that you still have costs going up. You still have other operational pressures that are taking place, and to have all of your books going down at a time when it's maybe hard to have a network that completely differentiates across every unique demographic in the market. With respect to the exchanges, I could see scenarios where network configurations are different than the larger commercial book of business as a way to appeal to that population or that member in the exchange or that price point, possibly. That's going to vary by market. It's going to depend on many different factors. The supply of the beds in markets; some markets don't have enough supply of beds to really accommodate a narrow network product. Some markets don't have the necessary asset locations for a particular system, where a system can actually be a narrow network. So there's going to be unique opportunities and unique challenges with that concept. And in some sense, I think it's got a lot more play, theoretically then it will practically, in a lot of markets. But I do see happening in some. And we actually compete with, against narrow networks right now. I mean, we compete in a handful of markets on the core commercial book, where there are narrow-network products. And we figured out ways to position our company successfully in those markets and to have a very vibrant system. So it's definitely a possibility, but I don't think it's going to radically change the marketplace.

Joshua R. Raskin - Barclays Capital, Research Division

I want to avoid sort of specifics around reform, because you guys have been saying that you're going to have your model available this summer. So I don't want to ask for specifics around that until you guys are comfortable sharing the numbers. But conceptually speaking, seems as though, you get the benefits of coverage expansion in the short term. And then over time, the cuts, the DSH payments, et cetera, around reimbursement tend to grow and in aggregate, accumulate over time. Do you think there's a point at which reform is no longer a positive, and are we going to start hearing things about, not a doc fix, but a hospital fix every year, something like that?

Victor L. Campbell

I guess a lot of things, as we look at this -- the hospital business, let's go back to when reform was first passed. And there was a lot of question, even within the industry, it still is today. One of the position's due Washington. And my belief was, hospitals are always going to be facing [indiscernible], whether it's to -- because of the deficits or whatever, the pressures are going to be there for cuts. So one of the early reasons hospitals went to the table clearly was, "Look, we're looking at cuts anyhow. We're going to be willing to put some cuts on the table to get coverage expansion." And because we saw coverage, we saw the uninsured number as big, and only getting worse. There was nothing. And I think without the Accountable Care Act, there was nothing that was going to turn that. Been around for a long time, and there was -- it just wouldn't happen. You might have a CHIP program that pick up a little here or there, but nothing in -- in a large way. Now you can just sit and look at it. I mean, we know the cuts that are out there and clearly, they go on for many, many, many years. So it depends on how you want to look at it, whether you look at it annually, or look at it over a 10-year window or 20-year. But there will -- the coverage will move in over some period of time. And I guess that's the biggest question as to how fast is the uptake on the coverage? And clearly over the next 2, 3, 4 years, that's where you're going to see the coverage expansion, most likely. And then it will probably level off a little bit. But at that point in time, you're going to have utilization going up, because of the aging in a population that we always talked about. But if you really looked at the numbers there, that's going to continue to drive volumes. Cuts are going to be there. So I don't know how long you'll continue to manage and look at the Accountable Care Act and what does it do. We kind of look at it as this is the 10 years that it's in place. And I think the net will be positive, but yet to be seen exactly how it will flow.

Joshua R. Raskin - Barclays Capital, Research Division

I apologize, we're already 2 minutes plus over. So we're going to hold Q&A for now. We've got a 15-minute break in the conference. After that, we're going to reconvene in Poinciana 3 for the breakout, where everyone will get some opportunity to ask HCA and ask some questions.

W. Mark Kimbrough

Thank you.

Victor L. Campbell

Thank you.

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