HCA Holdings' Management Presents at 38th Annual Deutsche Bank Health Care Conference (Transcript)

May.30.13 | About: HCA Holdings, (HCA)

HCA Holdings, Inc. (NYSE:HCA)

Presents at 38th Annual Deutsche Bank Health Care Conference

May 30, 2013 9:20 am ET

Executives

R. Milton Johnson - President, Chief Financial Officer, Principal Accounting Officer and Director

Victor L. Campbell - Senior Vice President

Analysts

Darren Lehrich - Deutsche Bank AG, Research Division

Darren Lehrich - Deutsche Bank AG, Research Division

Okay, good morning, everybody. We're going to get started here. Welcome to this session. My name is Darren Lehrich at DB's health care providers team, and with us today, HCA Holdings. From the company, Milton Johnson, he's the President and Chief Financial Officer. To his right, Vic Campbell, who heads up Investor Relations and Government Affairs; and Mark Kimbrough, Vice President of Investor Relations.

As some of you know, we're going to be doing this session as a fireside chat, so no formal presentation, but we certainly welcome your questions as I move through a discussion and please feel free to raise your hand at any point in time. We'll get the mic to you and get your question in.

So I'm hoping to cover a lot of ground here. And first, I think we'll focus a little bit on operations. I want to shift some questions about the Affordable Care Act and hope to get the capital structure as well. So Milt, just to really start the conversation, I wanted to focus a bit on volumes. Like everybody else, HCA had a bit of a rough first quarter. But overall, I think your volumes have been quite good on not just an absolute basis, but relatively speaking, very good. Can you just help frame for us what's going on nationally with hospital utilization, why you think HCA stacks up a bit differently from some of the national trends we've been seeing?

Question-and-Answer Session

R. Milton Johnson

Sure, Darren. First of all, we have -- we've had a very good run relative to volume overall. Before the first quarter result, we had 20 -- I think it was 21 consecutive quarters where we saw positive adjusted admission volume growth. And although the first quarter, I think, was maybe adjusted for the calendar when you think about leap year and where New Year's day fell on a week -- a day last year and the timing of Easter, when you normalize for the calendar, we certainly would have reported, I think, close to 2% of volume growth in the first quarter. But when you look at the national view, when you look at HCA markets, we look at our market share. Unfortunately, our market share is somewhat dated. So today, we have mostly third quarter data, we have some fourth quarter data. But looking at the latest data we have across all of HCA's markets across the country, we're seeing demand flat to slightly up. So flat to maybe a half a point up. But when you look at HCA's performance within those markets, we have gained about 58 basis points of market share across the markets. We have gained market share in about -- we tracked 37 different markets and we have gained market share in 29 of the 37. And we've gained market share in most of our service lines. So we're certainly very pleased with that result from -- on the volume front. Now how have we been able to accomplish that? Well, there's not one single factor, I believe, that we can point to, but there's numerous factors. First of all, just the fact that our overall volume performance has been very consistent, it has to do, first, with the markets we're in. We're in outstanding markets. As you know, our markets are primarily in the Southeast or in the southern part of the country through the southwest to the western part of the country. In most of our markets, we're seeing net, we're seeing population growth and that's creating some demand -- better demand in our markets in the country overall. And then in addition to that, when you think about HCA size and scale and our ability to take best practices that we learn from one market and transfer that across all of our markets or most of our markets, that really helps us to achieve our results as well. We've developed all sorts of contact centers, transfer centers, improving our touch to the consumer as well directly to the patient. Our investment in physician practices and integrating our physicians in markets with our other access points, developing additional access points, especially freestanding EDs as -- and so all these things together, I believe, contribute to the success that we've been seeing on the volume front. Then you overlay our capital spend strategy on top of all that to make sure that where we see an opportunity to expand either service line we have or site services. And also, when we look at our market, we feel like that this market, we've got the right amount of service offerings in a market and how can expand that market and we think about going out with rural outreach to try to capture more of the market share that's coming into our urban market from the rural markets and how can we capture more share there. So we've been focused on that agenda. And then, again, putting our capital spend in place to make sure that we're not restrained -- we do not have any restraint on our volume relative the capacity. So all that together, over the last several years, has really enabled us to achieve a volume result.

Darren Lehrich - Deutsche Bank AG, Research Division

And Milt, do you think that the next -- you had 20-plus quarters of positive volume. I mean, do you think that the longer-term view is still for positive volume growth as you look out over the next 3 to 5 years for HCA?

R. Milton Johnson

Well, I'm optimistic on volume in our markets. One, we continue to see an aging of the population. If you think about where we are, especially in the state of Florida, I think you're going to see some natural demand growth from the aging population. And again, the markets ran. We're continuing to see population growth in many of our urban markets. But also, I think that if we can continue to see the economy improve over the next several quarters or next couple of years, that definitely, I think, will help with demand as well. We really believe that the economy, over the last several years, has really dampened the demand for health care services, especially any sort of elective procedures really have been dampened with the economy. And as the economy comes back, we expect to see demand return with the economy as well.

Darren Lehrich - Deutsche Bank AG, Research Division

Vic, wanted to bring you in the conversation a little bit just around Medicare, and we obviously had a pleasant surprise from the inpatient PPS proposal that came out certainly versus what some of us thought it might have -- could have been. Can you talk about how that looks for HCA and also from just a rate perspective? And then in terms of disproportionate share, how does that factor into the next year?

Victor L. Campbell

All right. Thanks, Darren. Well, I guess, as you know, when we projected our year-end guidance early in the year, we had anticipated that the DSH reductions, Medicare DSH reductions to the company would kick in, in 2014, I guess, effective really October 1, '13. And it looked like they could hurt us by about $200 million a year based on some of the conversations that had been taking place in Washington and out of CMS and others. We were pleased with the, again, proposed rule that came out a few weeks ago now that basically keeps the formula similar to what it's been in the past, we think, more appropriate as do most hospitals in this country. So now we're looking at the -- at DSH as being roughly the same as it was the prior year. So that was a very positive move. Again, it's a proposed rule. There are some that don't like it and that's what comment periods are for, so it will be August before we see a final rule. But net-net, no matter kind of where it goes, I think, we'll be much better off than we look like back in, say, January or February.

Darren Lehrich - Deutsche Bank AG, Research Division

Yes. And that $50 million, Milt, wasn't enough to change your view for the year, obviously. But how should we think about that in the context of your broader range of guidance?

R. Milton Johnson

Sure. So we arranged for the EBITDA guidance for 2013. We had a $250 million range, $6.25 billion to $6.5 billion. So certainly improved our position and the range, but we did miss our first quarter target as a result of the volume shortfalls. So it helped, I think, put us back into the middle of the range as opposed to anywhere near over the top of it.

Darren Lehrich - Deutsche Bank AG, Research Division

Yes. And just on the cost side, last question I had on the operations before I shift to reform a bit. But just can you update us on some of the adjustments you made in response to Q1 and how that's progressed as we move into Q2 now?

R. Milton Johnson

Sure. On the cost side, we came into Q1 on a really strong volume uptick, especially in the third and the fourth quarter of 2012. Flu was driving some of that volume, but we were actually seeing strong outpatient volume. Outpatient surgical volumes were running well -- high as well. January actually was -- January of 2013 was a very strong volume month for HCA, and then in February, our volumes abruptly dropped. It was a drop in flu volume. Again, the calendar worked against us as well, but we just saw, even on the same-day basis, we saw a drop in volume. Actually, it was pretty abrupt in the month of February. March bounced back somewhat, but still softer than what we had planned for. As a result, we had certain costs built into the calendar. And as you know, our seasonality of our business typically in the first quarter, we see somewhat, at least historically, a higher demand. And so we make some certain commitments in staffing, especially in the state of Florida relative to that. Now we were able to work through that by the end of the first quarter, but it did affect our ability to just as quickly maybe as we typically could because of the commitments that we had made on certain staffing requirements. But we did make changes. We made changes with our variable labor. We made -- we did have some reductions in the overhead area as a result. We took a look at all of our discretionary spending. We really tried to put a stop to any travel, really, in the corporate setting. Basically, we froze positions and put a hold on any new hires coming in until we could see what happened and how things were developing in the second quarter. Now all that being said, what we did not do, we did not stop spending on what we see is our key initiatives around volume growth, around our quality agenda and around our electronic health record deployment. We maintained our spending there. We believe that those areas are essential for our future success, and we did not cut back spending in those areas. So we came into it, not hitting the volume levels that we expected. Our expenses ran higher than we expected in the first quarter, but I think we've made the appropriate changes. And I think again, when you look at the bigger picture, not just the quarter but how we manage cost across the company, I think we've demonstrated over a long period of time that we're very effective at managing our cost structure. And we do that by using our size and scale. We do it with our shared services agenda. We do it with taking best practices at the intellectual capital we have from being able to learn something in one market. Just as I said on the volume side, we can do that and we can do that on the cost side as well, more effective in terms of our physician spending. We've become more disciplined. We've improved our filters on the physicians that we hire. We're better at operating the physician practices that we do own. We've improved that substantially over the last couple of years. So all those things again, and then I could get in supply cost there and about some things there. I think we have continued opportunity in terms of bringing professionals, supply chain management into the OR, which used to stop at the OR door. Now it goes inside, inside the red line, we call it, and I think that that's going to be some opportunities for us as we go throughout the rest of this year and into next year. So we have a number of cost initiatives and I feel very good about being able to manage the cost going forward. But certainly, leveraging our fixed cost with volume growth is key for us to get our targets that we've set with our revised guidance, which is to finish the year around 3% to 3.5% operating expense growth per adjusted admission.

Darren Lehrich - Deutsche Bank AG, Research Division

Yes. And just on one of the points you made on supplies and bringing a little different approach inside the OR, can you just give us some examples of how you're executing that strategy there?

R. Milton Johnson

Sure. Well, some of it is straightforward, some is more complicated. For example, one thing that's very important is to keep the physician preference cards updated. And that sounds simple, but believe me, it takes an effort, a concentrated effort, to do that. And so one thing is making sure that the various instruments and the surgical trays that the physicians, the surgeon, requests, that they're up to date. So we have what they're going to use, and if they're not going to use it, we do not have to waste that particular surgical instrument or device. So that's one piece. Another piece is, for example, certain procedures and a physician may say this instrument is going to be optional. I may need it or I may not need it. In many cases, that instrument would be taken out of the package and put on the tray, which means it couldn't be reused. So now we're saying, let's don't -- let's make sure that instrument stays sterile and that it if a physician does need it in the case, then we can put it back. And it's about inventory management. So all these things together, they sound maybe simple, but when you put those in effect in the number of surgical procedures that we have in our facilities on a day-to-day basis, it can make a material difference in the supply cost such as the few examples, practical examples of what we're doing by bringing professional supply chain management into the OR.

Darren Lehrich - Deutsche Bank AG, Research Division

That's great. I'm going to shift gears a little bit here to the Affordable Care Act. We got a question here. Good. Please bring him the mic, if you could.

Unknown Analyst

Just want to quickly piggyback on your granularity into the OR and just kind of how you're driving some change per admission to increase EBITDA. Just curious how you're structuring your agreements with some of the physicians. Can you talk about gainsharing and how that possibly has changed some behavior and then trickled into a difference, if at all, in outcomes, in patient outcomes?

R. Milton Johnson

Yes, that's really not gainsharing with the upsell with our physicians on supply costs. It's really not a material piece of it. It's -- that piece is, of course, more complicated, I think, from a compliance standpoint. Now on a larger scale, and I'll use Richmond as an example, we're looking at a clinically integrated model with our physicians in that market and setting certain quality targets and cost targets. And if we can achieve certain results over time, there is an opportunity to share some savings with the physicians under that model. It's a very regulated model. But with respect to our supply agenda, gainsharing with physicians is not on the -- is not part of the agenda.

Darren Lehrich - Deutsche Bank AG, Research Division

So obviously, still a lot of unknowns with the ACA, especially in terms of how the Medicaid expansions can play out here in some of your key states. I guess I wanted to explore the discussion a bit though, given it's still pretty relevant to a lot of the people in the room. In terms of the enrollment process for the exchanges, what role do you see HCA playing in its communities in terms of engaging with prospective patients who are eligible for coverage? And just overall, how do you think HCA engages around this?

R. Milton Johnson

Sure, Darren. I think we will have an opportunity in that regard. I'm not sure exactly the tactics and exactly how we will do that. We are currently exploring a couple of different ideas. One, we are right now in the middle of market research with respect to how -- what would be effective -- what type of communication and marketing would be effective with various groups and how we would target that communication. It may be also that we -- the other avenue that we could explore out for some discussion may be in other parts of the health care industry that has always been successful is working with foundations or possibly funding a foundation that would help maybe with premium support. I'm not sure exactly if under the compliance and regulatory requirements we can do that or how far we can go with that. But we do believe there's going to be an opportunity for HCA in certain markets and in certain states to participate in helping communicate and to market to the uninsured about the opportunities for subsidies and the opportunities for health insurance in those markets. We just haven't figured out all the detailed tactics about the best way to do that just yet.

Darren Lehrich - Deutsche Bank AG, Research Division

And just in terms of your focus group work, what are the early reads from what the consumer is telling you about how they might want to be engaged?

R. Milton Johnson

Sure. Our focus group, what we're trying to understand, who's the decision-maker in the family and then what is the most effective communication? How do you reach that decision-maker? Is it via the Internet? Is it through TV? Is it through radio? Is it through a mass mailing approach? And so really, what is the most effective method of communication and who's the decision-maker. And many times it's the female of the household is what we're seeing now will be the decision-maker in terms of health insurance. So -- and so if we're taking all that information and trying to determine, so with that, how do we craft the best communication approach to maximize the return on investment? Now again, just to be clear, today, we haven't made the decision to execute on that strategy. We're still in the process of getting the feedback from the market research in the focus groups and so it's a little too early to say exactly how much we'll invest or exactly what we will do. But I do think, at some level, we'll have an opportunity and it will probably be a market-to-market approach. We will probably take that approach in markets where, obviously, we have the most upside and not necessarily a national approach to whatever outcome from this work we decide to pursue.

Victor L. Campbell

Darren, I might add, I think that's an important point. It's market by market. We are learning. It's dramatically different in one market than the other. So there isn't a one-size-fits-all as to how you reach the uninsured. And we're very, very focused. We know where they are. We know which of our hospitals. We got markets where we might have 6 hospitals where the uninsured all go to those 6. So we're structuring and focused and that's where they live. So we're looking at that. What we are finding is they don't know much about it and that's what national you're reading here, people don't really have a clue what's happened and how to go back getting it. We are finding they want insurance and they want to be treated like somebody -- like normal people. The one thing that you're finding out very quickly is that a lot of the uninsured, they don't even like to go to health care facilities because they feel like they're treated poorly if they don't have coverage and insured and they're kind of like -- treated like a lower tier citizen. So they want some sort of equal treatment. So I think there's a lot of learning process to take place in that whole process. And of course, it does differ by state. In our states, we have 4 states that did expand Medicaid, Colorado being the biggest of ours, California, Nevada, New Hampshire, the 4 that have expanded. In those other states, the approach will be a little bit different because about half of those people that would have qualified for a Medicaid expansion will probably qualify for an exchange. And again, you've got to go out and figure out how to educate that group on something a little different. The Medicaid is a little easier, a little quicker, but obviously if they qualify for exchange, it's probably a little better paying product.

Darren Lehrich - Deutsche Bank AG, Research Division

Yes. And just when you think about the uninsured that come through your system in any given year, what portion of that uninsured business is repeat business? You'll have an opportunity to work with them so that you avoid the uninsured visit in one of the states as you described.

Victor L. Campbell

I don't know...

R. Milton Johnson

Yes, we haven't -- I don't have that exact number. I would assume that in terms of emergency room, that there's quite a bit of churn, I would think, possibly in the emergency room. We've got approximately 1.7 million ER visits, uninsured ER visits in our system each year. So I would think that there's a certain amount of repeat business there. And actually, we're trying to run those numbers and see if we can refund that a little bit. With respect to inpatient activity, I would think it would be substantially less. We have about 130,000, 140,000 inpatient, uninsured inpatient admissions each year. I would think it would be substantially less churn or repeat inpatient admissions. But in the ER, again, I think it's going to vary quite a bit, maybe facility by facility, but I would expect when we see the results, that we're going to see a pretty high level in certain facilities of the same patient coming back to the ER.

Victor L. Campbell

I know at the individual hospital level and our people around the field, they could give you those numbers. We haven't really taken to a corporate level though to know it, but we do know it. Southern Hills in Nashville, Tennessee where you get a lot of uninsured, how many of those are repeat? So that is a primary focus.

Darren Lehrich - Deutsche Bank AG, Research Division

Yes. Again, feel free to raise your hand if you got a question here. Otherwise, I'm prepared to keep going. This is my question and 30 follow-ups that you never let me have, Vic.

Victor L. Campbell

I'll get used to it.

Darren Lehrich - Deutsche Bank AG, Research Division

So I guess I wanted to maybe take a little bit of an excursion and maybe just briefly, but we're talking up here about the journal story about an HCA study that was published in New England Journal. I guess the real question here -- I mean, the results are great, that you've been able to show, but we have seen a lot more publication by HCA as an organization and I guess, I'm curious, Mil, just to get your perspective on what type of role do you think HCA has in putting forth the quality agenda in academic journals.

R. Milton Johnson

Sure. Well, as an organization, we feel we have a tremendous social responsibility with our position in the American health care system. As you all know, about 5% of all the hospital care in the country, 4% to 5% is an HCA hospital. Those numbers become pretty staggering when you think about ER visits in terms of we talked about a minute ago, but 6.5 million emergency room visits a year into an HCA ER. And so when you think about our -- and our markets, the fact that we're from the East Coast to the West Coast, we're not geographically constrained. We have diversification in geography. We have diversification of service lines, so we don't depend on one single service line. And as a result, we believe we have a very good opportunity like the study that Darren referred to with respect to reduction of MRSA infections across the -- by 77 of our ICUs. And it made substantial difference. If you haven't seen the results that were published this morning as it was in the -- it's going to be in the New York -- or the New England Journal of Medicine, that's also in the Wall Street Journal this morning talking about the reduction from -- and the test or the clinical study was done in HCA hospitals. Again, over, I think, about 43 of our facilities, 77, I think, ICUs were typically for MRSA. A patient comes in, they would be tested for MRSA and they were determined to be -- to have a MRSA -- carrying MRSA, the infection may not be showing up yet, but they do have MRSA, then they might -- they would probably be isolated and then treated with the germ-killing infection soap and a nasal ointment. And so what we did -- or what the study did that was different is we took all of our ICU patients in this clinical trial and used the germ-killing or infection-killing soap on all the patients, as well as the nasal ointment. And as a result of treating all the patients that way, before whether they were curing MRSA or not, it resulted in a 44% reduction in MRSA infection in those ICUs. And so this is across different geographies and different settings. So it's very , I think, very, very important clinical outcome that HCA led. We had certain academic institution [indiscernible] involved and we were working with the CDC, but it was all conducted within the HCA facilities. So I think that's one, just a terrific example of how our focus on clinical quality can help improve outcomes not only in the HCA system, but in the nation's hospital systems and health care delivery systems overall. So we're proud of that and you mentioned we have been published. You have seen HCA published more frequently in clinical journals and it's by design. We -- I think we've been doing a lot of good work over the years, and quite frankly, we haven't been getting the credit for and some of that may have been our fault for not being as aggressive as we should be on that front and I think you'll see us be appropriate in trying to get more information out in that regard. Also within HCA, over the past several years, we have really invested in our clinical agenda. I think we've always been very proud of our quality in our hospitals, but I would say today that we're going to continue to raise the bar within our facilities. We have strengthened the number of physicians that involved in our hospital management teams today. So we have Jon Perlin, who is our corporate-wide CMO and head of our quality agenda. But also now we have CMOs in the divisions. We have CMOs in most of our hospitals, and so we've invested in physician leadership in our management teams to help improve the quality outcomes and to help deliver the clinical agenda within our facilities. And I think this is going to continue to pay significant dividends for HCA as we go forward.

Darren Lehrich - Deutsche Bank AG, Research Division

That's great. So I wanted to ask one question, and if we have any in the back there for him, why not? Just on PARA/LINE. We know there is obviously the big business win with LifePoint. They have been talking a lot about that. I'm just wondering if you can give us an update on some of the service offerings where you think PARA/LINE is gaining traction and how you're thinking about third-party external customers going forward.

R. Milton Johnson

Sure. Yes, we're very pleased with the LifePoint experience so far. I know that -- I think they are, too, at least they can tell me that. And we think that revenue cycle service offerings will continue to be an opportunity to third parties. It is a long sales cycle. Organizations make that decision over a period of time. And typically, that decision is made after we come in and do a consulting engagement that will demonstrate the opportunity they would have to reduce the cost and improve performance. So if you look at the LifePoint results and I have -- I know that Jeff Sherman may have been here yesterday, but it's not only a reduction in cost of the billing and collection function, but it's an improvement in revenue. We have a very effective denial management process to help collect more of the revenue that's due to hospitals through our processes as well. So we think that we're going and we can, through a consulting arrangement, and to prove the business case, so to speak, and then let us demonstrate with a -- on a pilot basis the opportunity. But that is a slow process, but we've got, right now, a pipeline that I think over time will deliver again continued growth opportunities through revenue cycle management for PARA/LINE. Supply chain is another service offering, I think, where we can deliver solid results, taking -- when you think about the business opportunity for PARA/LINE. So PARA/LINE is providing all these services to HCA. In my view, best-in-class capability in terms of supply chain and revenue cycle. But we have consolidated AP. We have consolidated payroll. We have consolidated credentialing. We have consolidated health information management. So there's a spectrum there of services that PARA/LINE delivers to HCA and we can deliver to third parties as well. So what we're marketing is we have the size and scale and the execution ability that HCA has and we can deliver that to a third-party system and typically bring a lot of value to that system. So we're excited about the future of PARA/LINE and think that, again, over the next several years, it'll be a continuing growth opportunity for PARA/LINE and for HCA.

Darren Lehrich - Deutsche Bank AG, Research Division

We've got about a minute left, maybe a quick one in the back here. Just one last thing in PARA/LINE, I'd ask this briefly, population management and capitation tools, is that something that you're able to sell at this point? And how are you thinking about that?

R. Milton Johnson

It's not at this point. We have not yet -- we don't have that capability within PARA/LINE today. That is something that we're evaluating. Most likely, to be able to deliver that on any significant scale may require an acquisition to do that. But certainly, it is a service line that we think we will see that there will be growth in demand for that capability. But it's not something that PARA/LINE offers today in its services.

Darren Lehrich - Deutsche Bank AG, Research Division

Okay. Well, I want to thank HCA for joining us here. And everybody in the room, I hope you have a great day at the conference, and thank you again.

R. Milton Johnson

All right. Thank you.

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