HCA Healthcare’s priorities are to address immediate issues with its physician professional fee spending, capitalize on its unexpectedly strong payer mix and volumes, and increase its longer term, multibillion-dollar investments into expanding its share of existing healthcare markets.
That was the message sounded by Chief Financial Officer and Executive Vice President Bill Rutherford during a fireside chat held Tuesday at the 2023 Wolfe Healthcare Conference. The talk was held just days after HCA hosted its first investor day event in about 20 years, where the for-profit system’s leadership detailed a five-year growth plan that will be paid for, in part, by ongoing resiliency efforts.
The organization is confident that its current position is a strong starting spot for the growth, Rutherford explained.
Volumes have grown by an unexpected 5% year to date, and, as of the company’s early 2024 planning process, are expected to land between a stable 2% to 3% growth going forward. The macroeconomic environment also shows “a lot of positives” in terms of employment, with the executive noting that HCA’s salaries, wages and benefits are returning to historical trends alongside clinical labor turnover and recruitment “nearing pre-COVID” levels.
Physician professional fees remain the primary black spot for now. Those costs spiked due to the No Surprises Act and caught HCA and other large systems off guard. In October, HCA had disclosed during its earnings call that a physician staffing joint venture it recently increased ownership in, Valesco Physician Services, would be bleeding $50 million per quarter for the foreseeable future.
Speaking at the conference, Rutherford said HCA believes it has already “dealt with the most acute issues” related to the high professional fees. The company needs more time before it can give a road map for when those losses will be mitigated, he said, but it has “every expectation” that performance will improve following hospital adjustments, programmatic changes and other efficiency efforts.
“Clearly the marketplace has got some disruption—we're managing through it,” he said. “We have expectations, we'll address it just like we've asked other issues, but we expect to improve the run rate of not only Valesco but our physician pro fees going forward.”
An eventual break-even on Valesco would be a “fair expectation” for investors—and certainly would be acceptable for HCA as of this stage of quarterly losses—but the decision to begin assimilating Valesco does help shield HCA from major jumps in professional fee spending like the 20% or so seen this year, Rutherford said.
“We have now a scaled operation, where it gives us an alternative,” he said. “Where historically your only alternative was to either pay the subsidy or [request for proposal] it to another provider, and there’s not a lot of those left,” he said. "So now we believe there's an opportunity for us to provide a scaled solution for other providers. And so to the extent that some aren't able to get to a margin production and they're coming to us for a subsidy, we now have an alternative that we can incorporate these, these providers into.”
Another tentative source for optimism at HCA has been the company’s payer mix. Rutherford said HCA’s market expansions to date have helped the company capture greater commercial volumes—the exchanges alone accounted for about 3% of HCA’s total volumes pre-COVID but are now 4% to 5%.
Redetermination has so far proved neither materially positive nor negative, he continued. The company has been surprised to find that about two-thirds who were disenrolled have been able to reenroll, and “we are seeing some of those return with employer-sponsored coverage, or exchanges,” he said. “The numbers are still too small to draw any broader conclusions … still, I think there’s an avenue there.”
As for HCA’s contracts with commercial payers, the company is about 70% contracted for next year, “and maybe two-thirds of that are under new rates,” Rutherford said. The executive resisted questions seeking further specificity on those contracts’ pricing beyond a vague “mid-single digits” increase.
Capital expenditures to lean more heavily into growth spending
These immediate trends set the stage for HCA’s recently disclosed plans to increase its share of active markets from 27% to 29% by 2030.
To do so, executives said last week and Tuesday that health system leadership wants to continue expanding HCA’s network with more outpatient settings—from about seven outpatient sites per hospital five or six years ago to today’s 12 per hospital, to 20 per hospital within the coming years. These additions are expected to funnel more services to the hospital, which HCA is preparing for with a projected 944 inpatient bed adds by the end of 2023 and another 714 expected through 2024.
HCA already has $5.3 billion in capital expenditures approved for 244 different projects across the next two years, about half of which is earmarked for expansion and renovation and about $2 billion split roughly evenly for new inpatient and outpatient facilities, Rutherford shared during last week’s investor day. Another 200-or-so projects representing about $10 billion in potential expenditure are also being evaluated.
All told, the company told investors it will be targeting adjusted EBITDA growth of 4% to 6% across the next five years, as well as diluted earnings per share growth between 8% and 12%—the latter of which Rutherford noted represents the first time HCA has offered an earnings per share growth target in his decades of tenure at the company.
“We wanted to highlight the capital leverage of HCA between EBITDA growth, or operational growth, and our earnings per share growth,” he explained Tuesday.
The growth strategy shared last week also marks a strategic shift in HCA’s historical capital expenditure habits, Rutherford said. The company’s spending has generally been split 50-50 between growth and retain (i.e., keeping facilities up to date). Going forward, the expenditure breakdown will weigh heavier toward growth, he said.
“And of that growth capital, a high percent of that’s going to inpatient capacity,” he said during the conference. “Some of those are long-lived projects … and then you go into our network expansion—building out our outpatient setting, freestanding EDs, surgery centers, outpatient diagnostic. And then the third area goes really more [into] program investments, maybe expanding robotics, maybe expanding emergency room departments or surgical suites.
“But going forward, maybe 60% growth and 40% retain is a fair assumption,” he said.