HCA Holdings Management Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: HCA Holdings, Inc. (HCA)
by: SA Transcripts

HCA Holdings (NYSE:HCA)

Q2 2013 Earnings Call

August 01, 2013 10:00 am ET

Executives

Victor L. Campbell - Senior Vice President

Richard M. Bracken - Chairman of the Board and Chief Executive Officer

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

Samuel N. Hazen - President of Operations

Juan Vallarino - Senior Vice President of Employer & Payer Engagement

Eric Ward - President of Business Performance Group

Analysts

Justin Lake - JP Morgan Chase & Co, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

Brian Zimmerman - Goldman Sachs Group Inc., Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Albert J. Rice - UBS Investment Bank, Research Division

Andrew Schenker - Morgan Stanley, Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Darren P. Lehrich - Deutsche Bank AG, Research Division

Operator

Welcome to the HCA Second Quarter 2013 Earnings Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Mr. Vic Campbell. Please go ahead, sir.

Victor L. Campbell

Thank you very much, and good morning, everyone. Mark Kimbrough, our Chief Investor Relations Officer, and I would like to welcome everyone on today's call, as well as those of you listening on our webcast. With me here this morning, our Chairman and CEO, Richard Bracken; our President and CFO, Milton Johnson; and Sam Hazen, President of Operations. And then we have a number of other members of our senior management team here as well to assist during the Q&A.

Before I turn the call over to Richard, let me remind everyone that should today's call contain any forward-looking statements, they 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. Many of these factors are listed in today's press release and in our various SEC filings.

Many of the factors that will determine the company's future results are beyond the ability of the company to control or predict in light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements, whether as a result of new information or future events. This morning's call is being recorded and a replay will be available later today.

With that, let me turn the call over to Richard.

Richard M. Bracken

Okay. Thank you, Vic, and thanks to everyone for joining our call. Earlier this morning, the company reported its second quarter earnings results, which are in line with our purview of earnings release of July 16. Summary information concerning our second quarter performance was provided in today's release and will offer more detailed review of the second quarter performance in just a moment.

But first, I want to comment on the announcement we issued Monday afternoon. In it, we indicated that at the end of this year, I'll retire from the role of CEO. But more importantly, that Milton Johnson, whom you all know is our President and Chief Financial Officer, will become CEO effective at that same time. Let me just say that we are most fortunate to have Milton not only ready, willing and able to accept this responsibility, but he will also bring to the position a comprehensive understanding of the industry and investor community, a long-term appreciation of HCA and our culture and a competitive drive and ethical character to lead our organization in the futures. My congratulations in advance to Milton, and I look forward to supporting him and the entire management team to the Chairman's role.

Now a few general observations about the quarter. In short, we were pleased with the results of the second quarter. A modest increase in volumes, an increase in patient acuity and resultant revenues per visit, combined with an efficient cost structure, produced favorable results. Revenues increased 4.2% and adjusted EBITDA increased 7.6% compared to the same period of the prior year. Patient volumes for the second quarter, as expressed in same facility admissions, increased 1.3%, while same facility adjusted admissions increased 1.1%. Generally, if we adjusted the first quarter volumes for the leap year effect, second quarter volume growth rates are similar to the first quarter. More on volumes in just a moment.

As I mentioned, we were able to achieve favorable earnings performance through a combination of improved service mix and, importantly, a significant improvement in our expense structure. Same facility operating expense per equivalent admission increased 1.8% over the prior year second quarter. As we discussed on our first quarter call, volumes began to slow in the second half of the first quarter, and when this trend was established, necessary steps were taken. The benefit of these management actions continued through the second quarter and assisted in producing our favorable results.

Through the first half of 2013, our overall results are consistent with our internal plan. As Sam will discuss in a moment, our most recent data indicates that our market share trends remain favorable. We remain comfortable with our operating strategies and our significant focus on development of service line capacities and improvement of patient quality and service metrics.

Relative to our asset profile, we have had some developments worth noting. Shortly after the end of the second quarter, we announced the signing of a definitive agreement for the purchase of 3 hospitals in the Tampa, St. Pete markets. This acquisition will add approximately 700 beds and approximately $225 million in annualized revenues to our Tampa market.

Furthermore, and within the last week, we have opened 2 newly constructed hospitals in the growing suburbs of existing markets, 1 in Orlando and 1 in Salt Lake City. These new facilities that we are opening are smaller in comparison to our average hospital size and investment and will operate with an emphasis on outpatient services. We have 2 additional hospitals using the same design concept now under construction in the Houston and Fort Worth markets. Both are scheduled for completion in 2014.

We believe this approach will be a capital efficient way to stay aligned with population growth centers and provide access to our more comprehensive networks.

Also in the second quarter, we announced the acquisition of The Outsource Group. This is our first major acquisition for our Parallon enterprise. We believe this acquisition will be complementary to and augment the existing revenue cycle services provided by Parallon. Parallon now will be able to offer a full spectrum of services ranging from targeted point solutions to end-to-end full service revenue outsourcing for hospitals and physician organizations. A broader array of solutions now will be available to both Parallon and The Outsource Group's significant client base. We welcome the 1,400 new employees from The Outsource Group to our Parallon organization.

And finally, regarding health care reform, there are no major developments to report since our last quarter, although we did find a few additional exchange contracts since our last call. Now, 90% of our hospitals are contracted with at least 1 exchange product, up from 85% as reported in the first quarter. We don't expect any material impact on HCA from the delay in implementation of the important mandate and as most provider organizations, we are developing our strategies to participate in the exchange enrollment process for the uninsured. And so with that, I'll turn the call over to Milton.

R. Milton Johnson

Thank you, and good morning to all. Let me begin my comments this morning by thanking Richard for his leadership and countless contributions to HCA success. I'm looking forward to our continued relationship as you transition to Chairman next year.

I'm also grateful to our outstanding management teams across our markets and our corporate leadership team for their support. I understand the unique role HCA plays in the U.S. health care delivery system. I'm excited, as well as humbled, by the opportunity that lies ahead. As CEO, I will reinforce the mission and values of HCA, including our focus on improving patient experience and outcomes, while maintaining a culture of operational excellence and accountability for results.

Now let's move to a discussion of the second quarter. I hope most of you have had a chance to review our second quarter earnings release issued this morning. Sam and I will provide some additional information regarding the second quarter results, and then we'll take your questions.

We were extremely pleased with the second quarter results, which were the product of solid volumes, better than expected revenue unit growth attributable to increase in acuity and excellent expense management by operating management teams. As Richard mentioned, after the first 6 months of 2013, we are right on plan for the year. Of course, it hasn't been achieved exactly as expected, but after a difficult first quarter, we are now back on plan.

Revenues in the second quarter increased to $8.45 billion, up 4.2% compared to the prior year second quarter driven by both volume increases and revenue per unit growth.

Adjusted EBITDA totaled $1.689 billion compared to $1.569 billion in the second quarter of 2012. Second quarter adjusted EBITDA margin was 20% compared to 19.3% in the second quarter of 2012.

Net income attributable to HCA Holdings, Inc. totaled $423 million, or $0.91 per diluted share compared to $391 million, or $0.85 per diluted share in the second quarter of last year. Second quarter volume trends were consistent with the first quarter after adjusting for the effect of leap year in the first quarter of 2012, with same facility admissions increasing 1.3% and same facility equivalent admissions increasing 1.1% as compared to last year second quarter. Our same facility medical admissions increased 1.8%, while same facility surgical admissions declined 0.6% compared to the prior year.

During the second quarter, same facility Medicare admissions and equivalent admissions increased 1.9% and 2.3%, respectively. Same facility Medicare admissions include both traditional and Managed Medicare. Managed Medicare admissions increased 10% on a same facility basis and now represent 29.1% of our total Medicare admissions.

Same facility Medicaid admissions increased 1.8% from the prior year, while same facility Medicaid equivalent admissions increased 2% compared to the prior year period.

Same facility managed care and other admissions declined 1.4% in the second quarter, while same facility managed care and other equivalent admissions declined 2% compared to the prior year second quarter.

In the second quarter, uninsured admissions increased 6.3% on a same facility basis compared to the prior year. Same facility uninsured admissions represent 8.1% of total admissions in the quarter compared to 7.7% in last year second quarter.

Same facility emergency room visits increased 0.8% in the quarter. However, excluding the decline in pulmonary or flu-related volumes in the quarter, ER visits would have increased 2.6% over the prior year.

Same facility surgeries increased 0.1% in the quarter, reflecting a 0.2% increase in our same facility inpatient surgeries, while our same facility outpatient surgeries were flat with the prior year.

During the quarter, revenue per equivalent admission increased 2.9% on a same facility basis. This is partially due to an increase in our average length of stay in our case mix, a measure of inpatient acuity. Average length of stay increased 0.7% and the case mix index increased 1.6% compared to the prior year period. For the second quarter, higher Medicare case mix index helped to mitigate the approximately $30 million impact of the BCA sequester, resulting in a decline of 0.2% in same facility Medicare revenue per equivalent admission. Same facility Medicaid revenue per equivalent admission, excluding the Medicaid waiver programs, increased 6.3%. Medicaid case mix index increased 2.8% over the prior period.

Managed care and other revenue per equivalent admission reflected solid growth at 6.1% over the prior year period. Managed care and other case mix index increased 2% over last year.

Same facility charity care and uninsured discounts increased $461 million in the second quarter compared to the prior year. During the quarter, same facility charity care discounts totaled $796 million, an increase of $65 million from the prior year period, while same facility uninsured discounts totaled $2.014 billion, an increase of $396 million from the prior year period.

Now moving to expenses. Expense management was excellent in the second quarter. Same facility operating expense per equivalent admission increased just 1.8% compared to the prior year. Excluding HITECH and the Medicaid waiver program expenses, same facility operating expense increased 2.6% in the second quarter of 2013 compared to the prior year period.

Salaries per equivalent admission increased 1.8% on a same facility basis, and same facility productivity performance, as measured by man hours per equivalent admission, deteriorated 0.5% over the prior year period, and same facility wage rate growth was 1.5% in the second quarter.

Personnel costs associated with physician employment increased $13 million, or 4.9% from the previous year second quarter. Noncash share-based compensation expense associated with the company's management equity plan increased $14 million in the quarter over last year second quarter.

Same facility supply expense for equivalent admission increased 2% from the prior year period, primarily reflecting the reclassification of nonequity member administrative fees from our reduction in supply expense to revenues. The amount reclassified was approximately $37 million and contributed 260 basis points to the growth of supply expense per equivalent admission in the second quarter. The reclassification had no impact on the adjusted EBITDA for the quarter.

Same facility other operating expense per equivalent admission increased 1.6% from the prior year period. We recognized $52 million in electronic health record and incentive income in the second quarter compared to $70 million in the second quarter of last year, and this is consistent with our expectations.

The company also incurred approximately $33 million and $20 million in EHR-related expenses in the second quarters of 2013 and 2012, respectively.

Cash flows from operating activities totaled $814 million in the quarter compared to $1.46 billion last year. The $646 million decline was primarily due to a favorable benefit in 2012 from a decline in accounts receivable of approximately $390 million, which included the receipt of $271 million related to the 2012 first quarter rural floor Medicare settlement.

Also we paid $245 million in additional income tax payments in the current quarter compared to the prior year period.

Days and accounts receivable for second quarter increased by 1 day to 53 days compared to 52 days at the end of the first quarter.

At June 30, 2013, the company's debt to adjusted EBITDA ratio was 4.41x compared to 4.56x at March 31, 2013.

Our exposure to floating rate debt is approximately 10% of our total debt. At the end of the quarter, we had $2.985 billion of borrowing capacity under our senior secured credit facilities.

Before turning the call to Sam, I want to mention Parallon's implementation that both supply chain and revenue cycle services for LifePoint Hospitals is proceeding well and according to plan.

Now let me turn the call over to Sam.

Samuel N. Hazen

Good morning. I'll begin my comments this morning with more detail on the company's volume trends for the quarter and then provide an update on inpatient market share.

8 out 14 domestic divisions had growth in year-over-year same facility inpatient admissions. Our international division also had growth in inpatient admissions. 9 out of 14 domestic divisions and our international division had growth in same facility adjusted admissions. Overall, the growth inside our portfolio of domestic hospitals was similar to the first quarter. In the second quarter, 60% of our domestic hospitals had growth in inpatient admissions and 57% had growth in adjusted admissions.

As Milton indicated, emergency room visits were soft in comparison to past trends. Only 6 out 14 domestic divisions had growth in emergency room visits. EMS transports to our hospitals were up almost 1%, with 8 out of 14 divisions growing. We have seen a general softness in the lower acuity emergency room business, and there has been some increased competition in a number of markets. We feel these 2 factors are part of the reasons for the slower growth rates. The company continues to invest significantly in the service line to increase accessing capacity, to improve operational efficiency and to enhance quality and service. All of this, we believe, positions us well from a competitive standpoint in today's market and into the future.

Total surgeries for the company were up slightly in the quarter, with hospital-based surgeries up 1.1% on a same facility basis, and our ambulatory surgery division down 2.3%. This is a good improvement over the first quarter.

Inside our ambulatory surgery division, overall cases, which include certain endoscopic and pain management procedures that are not counted in our surgery volumes, grew by 4% as a result of some recent acquisitions and new facility development.

As indicated, acuity this past quarter was strong. Average length of stay in our adult and neonatal intensive care units was up 2.7%. This continues at similar trend we experienced in the first quarter.

Behavioral services admissions were up 2.6%, and acute rehabilitation admissions were up 11.3% in the quarter. These metrics are generally consistent with the first quarter.

And finally, deliveries were up 1 point -- up 1%, and the first quarter deliveries were down 1%.

Now let me transition to some market share highlights for the 12 months ending December 2012. Once again, this is the most current data available for the company, and it represents almost 90% of the company's markets.

First, the company's inpatient market share during 2012 increased 56 basis points to 23.7%. Overall, inpatient demand in our markets increased in 2012 by 0.4%. This is a slight weakening from 2011, which had market demand growth of 0.8%. Inpatient demand, however, in the fourth quarter of 2012, was up 1.1%, reflecting a busy flu season. Sequentially, market share increased in the fourth quarter as compared to the third quarter. This follows sequential market share gains in each of the previous 5 quarters. We gained market share in 14 out of 17 service lines. HCA had market share gains in 29 out of 37 markets, with growth in 9 of our top 10 earnings markets. Market share in both the commercial and in migration segments of our business grew, reflecting continued success with our outreach efforts in these 2 distinct markets.

Across all of these market share metrics, the company's trends are generally consistent with past reports. This pattern reflects solid execution of our growth agenda.

As you already heard, expense management in the second quarter was very strong. Our management teams executed very effectively. We will remain focused in the last half of the year on the same areas that we shared with you during our first quarter earnings call and we believe these efforts should put us in a good position to maintain our cost structure in the last 2 quarters of the year.

With that, I'll turn the call back to Vic.

Victor L. Campbell

All right, thanks, Sam. All right, now I'd like to for you to come back on, encourage everyone, as we always do, to try to hold your questions to just one at a time so that everyone has an opportunity. With that, Noah?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Justin Lake with JPMorgan.

Justin Lake - JP Morgan Chase & Co, Research Division

Can you give us an update, there's been a ton of news on public M&A recently, 2 deals announced. But even outside that, just wanted to get your thoughts on what the M&A pipeline looks like and if you had a chance to evaluate any of these deals and your thoughts on them?

Victor L. Campbell

All right. Milt, do you want to address that?

R. Milton Johnson

Sure. I don't think we should address comments on the M&A activity in the public traded market right now as those transactions are still ongoing and incomplete. But overall, as Richard mentioned, we have signed some agreements to pursue acquisitions in our existing markets, we like that approach, they help round out in existing markets, improve our position in markets. We have transactions that are pending, subject to regulatory approval in both Kansas City and, as Richard mentioned this morning, in Tampa. We're looking at some other opportunities that would be similar. Too early to tell whether those will work out and lead to an agreement. But we are actively pursuing acquisitions in the markets where it makes sense to us. We think that's a strategy that we will continue and excited about the opportunities. But as you all know, those opportunities for acquisitions tend to come and go in the marketplace at a certain pace. And we certainly are tuned to the market and looking forward to participating where it makes sense to us.

Richard M. Bracken

I just add -- this is Richard. I would just add that we still think that given health care reform and over the longer view that there will be consolidation in the industry, we think our platform allows us to participate very efficiently in that process. As we've said many times in the past, we are disciplined about where we acquire, how we acquire. And so, that will be our thinking as we assess possibilities. The pipeline, specifically to your question, is unpredictable. It happens when it happens. We generally are aware of most things that are going on in the marketplace and consider them. But short of that, we are pleased with our efforts to date. We add that to a strong position where there's organic growth in markets, and we think we have a pretty good growth story going forward.

Operator

We'll take our next question from Josh Raskin with Barclays.

Joshua R. Raskin - Barclays Capital, Research Division

I was wondering if you could talk to the improved earnings from a geographic perspective, if any markets jumped out. And maybe, specifically, comment on Las Vegas. There's been some discussion that that’s starting to sees an improvement? And I guess the last part of my first question is that in Vegas, if there's any thoughts around renewed discussions with the largest commercial payor there?

Victor L. Campbell

Sam, do you want Vegas?

Samuel N. Hazen

Yes, there was more than one question there. Let me start with the geographic performance of the company. We had a very balanced performance across the organization. We had many markets that performed better than planned. So for the most part, the performance across the portfolio in general was very balanced, with most markets accomplishing what we had hoped they would accomplish in the second quarter. We had a few markets where there were some struggles. But they weren't material, and we were able to overcome those with the ones that did perform well. It's important to understand, for HCA, Las Vegas represents maybe 5% of the company's earnings. And so from that standpoint, it's an important market, yes, but it's not a market that dictates the overall performance of the company. Having said that, Las Vegas performance this year and last year has been very strong for HCA. We have seen reasonable market share gains over the time period. I think in 2012, we picked up decent market share in Las Vegas and our financial performance has been solid because of a very disciplined approach given the economic pressures that exist in that market and some of the underfunding that exist within the Medicaid program. As it relates to the largest payor, as a routine, we do have discussions with them. We haven't at this particular point in time, reached any agreement that would reestablish relationships between HCA and Sierra inside of that market, but we do have ongoing discussions given our long tenured relationship with them.

Operator

We'll take our next question from Tom Gallucci with Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets LLC, Research Division

In terms of reform, just curious if you have any updated thoughts, I know you said nothing major changed in terms of exchange contracts and whatnot, but just updated thoughts on how you're thinking about the benefits as we look out, I guess, either specifically or directionally in sort of the ramp that you're thinking at this stage of the game? And when you might think that you're going to give us any more specifics on that topic?

Victor L. Campbell

All right. Thanks, Tom. I think Milton is going to address that.

R. Milton Johnson

Sure. Well, as Richard said, it's really not a lot of change in our outlook since last quarter. I'll maybe describe it this way, the uncertainty of health care reform, there's 2 main drivers where we still have a great deal of uncertainty. One, and to your question, what's going to be the ramp-up or the uptake on health care reform? In other words, how many -- at what rate and how many of the uninsured will sign up for coverage in the exchanges. That's a significant uncertainty for us. And then second, of those that do come into the marketplace and go into the exchange, how many will recapture? What would be our market share in the exchange? Are the payors which we have contracts with, how successful will those contracts be in capturing share? Those are 2 main drivers, of course, of health care reform impact on HCA, and we need some more time to try to get some clarification around that impact. And once we have that, I think we will factor that in. And as far as timing, right now, we want to keep flexibility with respect to the timing. Only we plan to give guidance on the health care reform impact. But right now, I would say, it would be no later, we think, than when we give guidance for 2014, which is expected most likely to be in February of 2014.

Operator

We'll take our next question from Brian Zimmerman with Goldman Sachs.

Brian Zimmerman - Goldman Sachs Group Inc., Research Division

To be able to hit your same-store equivalent admission guidance number of 1% to 2%, you need to see a bit of a pickup in the back half of the year to offset the weaker volumes we saw in Q1. How confident are you that you're going to be able to see that pickup in the back half of the year?

Victor L. Campbell

Milton, do you want to address that as well?

R. Milton Johnson

Sure. Good observation there. Although we're still -- we are reaffirming our guidance and, as I said, we are on plan with respect to our EBITDA guidance. With respect to the details of how we may arrive there, now that we're halfway through the year, I think that it's more likely that our adjusted admission growth for the year will be somewhere around 1% versus previously, I think, we'd guided or given details somewhere around 2%. Here it's halfway through the year, we're up 0.3%. And as I think about the overall revenue growth, I still think we'll be in that 3% to 5%, 3% to 4.5%, 3% to 5% zone as we stated before, because I expect that our net revenue per adjusted admission growth rate will also be higher than we first thought. We -- in May, we said it would be 2% to 3% on our call. Now I'm thinking more likely in the 2.5% to 3.5% sort of growth rate, making up the shortfall from the change in outlook on our volume growth. Year-to-date, we are about -- we're at 3.6% growth. That excludes, of course, the 2012 rural floor settlement out of the first quarter of last year in that growth rate. And then we still think our expenses for the year will come in, in that 3% to 3.5% sort of zone. In the first quarter, our expense growth, excluding HITECH expenses, grew 4.8%, and we're up 2.6% here in the second quarter. And that averages out to about 3.7%. So we still think our expense targets of 3% to 3.5% for the year is still reasonable targets. So our revenue, total top line revenue outlook is still the same in that 3% to 5% zone. But getting there, a little bit different mix between volume and revenue growth than we talked about in May.

Operator

We'll take our next question from Kevin Fischbeck with Bank of America.

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Just want to get a little more color on the exchange contract, I appreciate the color to 90% from 95% with 1 contract. But in the past you talked about the number of markets that have more than 1 contract, and going back to your point before about one of the unknowns being how much of that incremental coverage you will capture within your facilities, what is a good number of contracts to have in a given market as you think about it? Is one going to be sufficient? Is there a goal to get a certain number more than one in most markets?

Victor L. Campbell

All right. Kevin, I'm going to ask Juan Vallarino, I don't -- we really don't have the stats down because the numbers didn't change a whole lot from the previous quarter when we sort of walked through how many markets and contracts, whatever. And we sort of looked at that and, I'd say, no material change there other than 85% of our hospitals with the contract. We are at 90%. But Juan Vallarino is not here at Nashville, but I think he's on an outside line. Juan, you just want to share anything that you can because there's not a lot of specifics.

Juan Vallarino

Sure. Kevin, good question. Honestly, more contract is better in any market. I think the first year of the exchange, you are not going to know a whole lot so premiums get published from the health plans. The plans that you do have business with where they lie in terms with premiums as opposed to their competitors. And to date, only 2 of the states where we do visits in their published premiums. And they're still both under review. So we know very little today as anybody else both on the planning side or the hospital side about the potential grab of market share in the exchange. So right now, it's really a wait and see and try to get more contracts but knowing that their premiums are set already.

Operator

We'll take our next question from Chris Rigg with Susquehanna Financial Group.

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division

Just wanted to change gears a bit and find out what's the latest thinking on capital deployment. Obviously, some M&A and development going on, but just bigger picture, what you're thinking about doing with your cash over the balance of the year?

Victor L. Campbell

All right. Richard and Milt, you want to handle that one?

Richard M. Bracken

I wouldn't think that our position has changed from what we have shared with you in the past. We take a look at our cash flow and obviously after our CapEx, I will say this, we do see opportunities for perhaps increasing our CapEx sum. There are a lot of opportunities for growth within our markets. And we are evaluating those as we speak. So I do think there's some opportunity for some CapEx increases as we go forward. We continue to obviously, as you mentioned, to rate strategic acquisitions as a very high priority use. And as we just mentioned, we've been doing that. And then of course the other uses of cash are to be considered after those 2. And I really don't see that lineup changing anytime soon.

Operator

We'll take our next question from A.J. Rice with UBS.

Albert J. Rice - UBS Investment Bank, Research Division

Richard, I want to wish you the best in the future. Obviously, we have one more quarter with you, but do that, and also congratulations to Milton. Just to pick up on Milton's sort of walk-through to the back half of the year. Obviously, the 2 variables that have changed since your original guidance seemed like to me to be favorable are the cost-cutting efforts you put in place in -- at the end of Q1. I guess I'm curious whether that's fully reflected at this point in Q2 or would there be some residual benefits that will kick into Q3 that may make that walk forward seem a little conservative? And then I guess you had the DSH proposal as well come out more favorable, and I don't know what you think that will look like in the final rule, if you that any insight, I guess, will get that any day here, but that would -- those 2 would seem to suggest that analysis might have some upside to it. Is there any comment on that?

Victor L. Campbell

Let me do the DSH and then I'll let these guys talk about the cost-cutting and how it rolls, Sam, you probably want to do that. I think DSH, we know what you know. We've seen the proposed rule, and we would expect the final rule very soon within the next few days. But we know nothing more than that, and we'll wait until we see a final.

Samuel N. Hazen

AJ, it's Sam. I think the company moved really timely in the first quarter of making adjustments once we sense that volumes weren't where they were going to be. And most of those efforts around our adjustments to costs were accomplished in the first quarter and benefited the second quarter. There's -- were some residual efforts that occurred throughout the second -- part of the second quarter, if you will, that will have some incremental benefit as we move forward. Again, our cost performance depends heavily on our volume, and as we achieve where we think our volumes are going to be, as Milton indicated, we believe the cost structure is in a pretty good position. Having said that, we have a host of cost initiatives across the company that can produce some incremental value month in and month out and they're centered around supply chain initiatives, ongoing sharing of best practices through our process improvement teams, clinical excellence initiatives that yield improvements in performance across the company. So those things continue to yield value and will bleed in as those initiatives get executed. But for the most part, the substantial adjustments that we needed to make were accomplished in the first quarter. And we won't see the same kind of adjustments today that we had at that point in time.

Operator

We'll take our next question from Andrew Schenker with Morgan Stanley.

Andrew Schenker - Morgan Stanley, Research Division

So you guys mentioned in your plan to participate in enrolling patients in exchange of the Medicaid. Can you provide us maybe some more details on your strategy around that, are you going to formalize it by being an affixer or a navigator, maybe just remind us of how successful you guys are, generally, today in enrolling people in Medicaid and maybe even high risk goals?

Victor L. Campbell

All right. Andrew, thank you. Eric Ward who is with Parallon. Eric, do you want to talk a little bit about that?

Eric Ward

Sure. Today, our process for enrolling patients in Medicaid is a combination of in-company resources and vendor resources. As we move forward into the future with the exchanges, we continue to think we're going to use both resources from an outsource perspective and insource perspective to enroll people in the exchanges. We're working with our vendors today and are monitoring to see where we need to go in the future.

Victor L. Campbell

If I could add. We have a pretty successful component of conversion today. I mean, we monitor our conversions on Medicaid very closely. We benchmark against our vendors. And we think those lessons will apply as we move through exchange enrollment as well. And Eric and his team have a very robust set of metrics and systems underneath all of those efforts that give us confidence that we can use those same approaches, and hopefully, get the same kind of results as we move through the exchange. The difference though is you get retroactive approvals on Medicaid. We don't think we'll be able to get retroactive approvals on the exchange.

Richard M. Bracken

And let me just add. This is Richard. As we think about enrolling folks in the exchanges, there certainly is crossover with the skill set of the employees that are enrolling people in Medicaid as we speak. And so, as we look forward, there's opportunities to be, what's that, a training organization. We're certainly interested in that, so that we can use existing employee resources when we in-source to not only do Medicaid, but to do the exchange products or to the HCA and then also outsource where we need to supplement. So we think we have a pretty good plan. This is all developed -- this is in process as we speak right now and really will unfold over the next 30 to 60 days.

Operator

We'll take our next question from Ralph Giacobbe with Crédit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Want to go back to the volume side of things. Can you share any opinion you have on just the overall environment? We've seen more pronounced volatility between, certainly, at least the publicly traded group over the last several quarters. I guess do you have any sense or take on kind of the urban versus rural characteristics, volatility between markets and just general landscape? And along those lines, it will be helpful to get your take on a long-term basis, just remind us what you -- what kind of same facility revenue growth you think you can achieve and the underlying EBITDA growth that would translate to, maybe extra form.

Victor L. Campbell

All right. Ralph, that was pretty good, 1 question, became at least 3. I'm not sure we get to that last one anytime on this call, but you want to start out, we'll just talk about volume, Sam.

Samuel N. Hazen

Yes. I think one thing, and we've said this for years and we still believe that it's relevant to the discussion is that HCA has a unique portfolio of markets where it does business. And when you look at population trends and you look at the economic performance of this market, it's unique, I think, across the industry. And that's part of why we believe we have maybe different volume metrics in some respects than others. Having said that, we think our organic growth strategies are effective in yielding market share gains as we've talked about with a pretty strong market share gain performance over the past few years, and so there's execution also that we believe is yielding some inherent growth. As it relates to the urban, rural, the only point of reference I can give you is we monitor what we call the in-migration of business from the rural markets into these major metropolitan markets. And that segment of our business is the fastest-growing segment of admission activity on the inpatient side. The composite growth in 2012 was actually 2.8%. And as I indicated, for 2012, overall inpatient demand was only 0.4%. So you can see that at least in rural markets surrounding HCA's urban markets, there is a growing in-migration volume that's taking place, and that's why we're so focused on rural outreach in efforts to affiliate with rural providers to drive growth for HCA. I don't remember the other questions, Vic.

Victor L. Campbell

I think that was the primary one. And Milton, I don't know if you want to talk x reform, how we're looking at it.

R. Milton Johnson

Well, just -- let me just maybe look where we are year to date, there's some moving parts in the numbers. Let me just kind of real quickly walk-through and kind of get down to what we think is a normalized EBITDA growth, at least where we are through the first 6 months. So on a reported basis, all in, our EBITDA is down 4%. Where this year, you were at $3.257 billion for the first 6 months versus last year at $3.392 billion. But of course last year, we had the favorable rural floor settlement that was a net $170 million in EBITDA. If you back that out, then we're actually up 1.1% for the first 6 months. And then, if you consider HITECH, the impact of our HITECH income and expenses impact from EBITDA, so we've got less revenue from HITECH as you know in the first 6 months of this year and we had spent a little bit more on HITECH expenses rolling out the program this year. The net effect on EBITDA is that this time last year, we had a drag of -- I'm sorry, an impact of $88 million positive this time last year because of the HITECH revenue. And this year, we have a positive impact of $32 million into EBITDA. So if you normalize that, we're 3.3% up. And so, we're in that kind of low to mid single-digit range, which is kind of where we expected when you normalize for these moving parts, HITECH and the Medicare adjustment.

Operator

We'll take our next question from Frank Morgan with RBC Capital Markets.

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

I'd like to go back to the commentary around ER volumes, a little bit of softness there. Could you go back and explain a little bit about what you saw there? I think you may have said increased competition for lower acuity services, just wanted to clarify on that. And then any commentary on the geography of that trend in ER volumes and does it mirroring the rural hospital volumes?

Victor L. Campbell

All right. Sam, would you like to take that from Frank?

Samuel N. Hazen

We look at our ER business inside of the different levels of acuity. And we've talked about some of the acuity levels in past calls. And when we look at our business -- and really the first half of this year, but in particular, the second quarter of 2013, we actually had a decline in the lower level, the lowest levels of acuity, and that was fairly broad-based across the company. But we did have slower rates of growth in the other levels of ER volume, except for our most acute component of the ER business where we actually had faster rates of growth there than we had in the first 6 months of the last year as a comparison. When we look at the geography for our performance, we performed better in Florida, in the East Florida and West Florida in particular, on emergency room business. We think the tourist business in Florida has been stronger this year than in the past, and that's part of the explanation, but we do have a very robust emergency room growth plan across most of our markets. And that's yielding reasonable growth in other parts of the country. For example, in California, last year we struggled with emergency room activity. This year, we're actually having a very strong level of performance in the emergency rooms in California. There are increased competitors in both the urgent care space, as well as the emergency room space in a lot of our markets, whether that's coming from hospitals or freestanding entities, and we think that is yielding some pressure on the overall demand in this particular area. Having said that, we're still very bullish on our emergency room strategy. We believe there are opportunities to continue to differentiate in the market and gain market share and be a key part of access to the HCA system. And we're investing in capacity. In certain markets, we are investing in different sites. In certain markets, we are adding program capabilities across the company with trauma and stroke capabilities, which are important to other aspects of our business. We reach out very effectively with our EMS partners and work to resolve their problems. So we've got a lot going on in this area, and we still believe it's going to be a very needed service across a lot of our markets. And we don't know if this is a trend yet. It could be. But we think the aspects of this business will continue to yield solid growth, and we don't want to take our eye off the ball off this area.

Operator

We'll take our next question from Gary Lieberman with Wells Fargo.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Maybe go back on some of the questions around volumes. Is there any way to quantify the impact, if any, that new services or changes in service lines had on same-store admissions?

Victor L. Campbell

Sam, do you want to?

Samuel N. Hazen

I'm not sure exactly, Gary, what specific certifications you're talking about. I think that's such an ongoing effort with our facilities to gain accreditation where we meet certain quality standards and community standards. And that does have an impact, and that's a very good process for us because it forces discipline around performance and outcomes and so forth. But given that, that's happening on such a routine, I don't think it's incrementally changing the volume trends within the company. There are certain service lines where we add capacity and we do it and add capability because we don't have that service in a particular market, I'll use Nashville as an example. Our network in Nashville is very solid with geographical positioning and general capabilities. But a few years ago, we felt we did not have the full array of services to really accomplish what we wanted to accomplish as a network. And we've added more substantial children services, as an example. We're just opening up a level 2 trauma program, and that helps to round out the overall array of services in our market here in Nashville and makes us more competitive with respect to payors. It also attracts higher capability from a specialty standpoint. It really enhances our position in the communities. So those things are going on in multiple markets across the company and are incrementally there. But I wouldn't say they substantially change the overall performance of the company's volume metrics.

Operator

And we'll take our final question from Darren Lehrich with Deutsche Bank.

Darren P. Lehrich - Deutsche Bank AG, Research Division

I wanted to ask just about the hospitals that you're opening. You made the comment of just about the design with a little bit more focus on outpatient and a smaller inpatient footprint, I guess, is the implied comment there. And maybe just stepping back if you could give us a sense for what that might mean for your capital plan going forward and your existing hospital base. Obviously, you've done a lot over time to configure your hospitals. But might we see a little bit of a different shift in how you're spending and how does that play into CapEx over the next couple of years?

Samuel N. Hazen

Let me speak to the size of the hospitals and then someone else could jump in here on the capital as we need to fill. This is Sam again. These hospitals are in demographics in major metropolitan markets where there are opportunities to introduce an HCA facility and round out our network. As Richard mentioned, we usually start out with 40 to 60 beds, inpatient beds, as an example. And typically, you will see a younger population in these markets. So they're not demanding as much inpatient health care as you might in a market where there's a different kind of demographic. And so we'll start out with basic services on the outpatient areas, clearly emergency room capability, outpatient surgery, a lot of imaging, and then we'll have a lot of women services in those facilities because they're connected to a younger population and in our obstetric service line and so forth. But what's important is that they now are connected to a larger network and when there's a need for more sophisticated or tertiary service, we can work with our physicians and our other hospitals to transfer patients to more tertiary level hospitals and deliver the services that those folks need. Then over time, it grows. We add beds, we add services, we bring in new physicians, and we start to get the certifications that we just spoke about, and we put ourselves in a position where it becomes a much more substantial hospital, and they move to different levels of capability over time. And that life cycle can vary, it can be 10 years in some cases, it can be 5 in very unique cases. But it's typically a 10 to 20 years kind of cycle where these hospitals will move into a much more sophisticated level. But as it relates to these networks, they're very complementary and very helpful to rounding out those capabilities. And in addition to the 2 that Richard mentioned that are under construction, we're evaluating 2 to 3 other ones that we think make sense for us, and we will weave those into our capital plan as appropriate once we get through the due diligence on those analysis.

Richard M. Bracken

And I would just add that I wouldn't expect this to change the overall sort of distribution of how we spend our capital. We have had large projects come through the system in the past. They take different forms as they work their way through. But for the most part, I wouldn't see this as dramatically shifting the distribution of how we spend money within the company. We generally think of it sort of a facility percentage, a technology percentage. And with the one exception, I would think that perhaps, and as we mentioned on the Parallon acquisition, no, not particularly a CapEx comment, but we do see more opportunities around that space and cap investment in that space where we haven't, historically. So I just think maybe that's where it might shift some but not overall distribution.

R. Milton Johnson

I'll make this one last comment to wrap up. We have a very good process and discipline around our capital allocation process. Sam and Jon Foster and Chuck Hall operating teams are, of course, heavily involved in that. And one thing I think that we have done very well over recent years is being able to match our capital spending with capacity and growth opportunities. And I think our process is very good around that. It's flexible maybe to your point, depending on market dynamics. And going forward, I expect we'll continue to be very flexible and take advantage of the market opportunities.

Victor L. Campbell

All right. Everyone, I thank everyone on the call. I know Mark is here all day, and I'll be around. So give us a call if you need anything. Have a great day.

Operator

This concludes today's conference. Thank you for your participation.

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