HCA Healthcare: COVID upheaval giving way to stabilizing volumes, labor costs in Q2 2022

Stabilizing volume and cost trends have HCA Healthcare executives anticipating a gradual return to normal despite trimmed second-quarter profits and an early-year COVID surge that threw its initial projections into disarray.

HCA’s second-quarter COVID-19 admissions fell 70% from the first quarter and 18% year over year, now representing about 3% of its total admissions, CEO Sam Hazen said during a Friday morning investor’s call.

Although same-facility admissions and revenue were down 1.2% from the second quarter of 2021, same-facility revenue was up about 4% thanks in part to a healthy payer and acuity mix, he said.

These trends—along with a belief that labor and inflation expenses are being appropriately managed—led the company to hold firm on the amended full-year forecast it provided last quarter.

“It’s only been about five months since the last surge … and so we’re making some early judgments, [but] we believe there will be normal seasonality trends with respect to how volumes behave over the balance of the year,” Hazen said during the call.

Hazen acknowledged that inpatient growth was so far more “modest” than previously anticipated but pointed to steady outpatient volumes and the “incredible resiliency” of emergency room volumes, which were up 7.3% year over year on a same facility basis. 

“As it relates to long-term, intermediate-term demand, again, we’re not seeing anything structural that would suggest that overall demand is reduced or necessarily increased beyond what its normal trends were," he said. "We think on the inpatient side, healthcare demand at least in our markets is somewhere between 1% and 2%, and a little bit more than that on the outpatient side. So that lines up with our pre-pandemic thoughts around overall demand,” he said.

HCA reported second-quarter revenues of $14.8 billion, up slightly from the $14.4 recorded during the second quarter of 2021. Net income attributable to HCA was $1.2 billion, down from $1.45 billion the year prior thanks primarily to a roughly $742 million year-over-year increase in expenses.

Labor costs, which were a major drag on HCA and other health systems' finances during the January surge, also look to be normalizing for the 182-hospital for-profit system.

HCA’s contract labor reached peak high rates and utilization during the first quarter, Hazen and Chief Financial Officer Bill Rutherford said. These numbers both dropped with each passing month in line with expectations, they said, although there’s still room for further declines as of the end of the second quarter.

Hiring and retention of nursing staff increased 18% over the first quarter, Hazen said, aided in part by a mid-single-digit increase in nurse compensation. The CEO said HCA’s work with Galen College of Nursing (in which it acquired a majority stake in 2020) to open new nursing schools in its markets has been progressing well and will help alleviate labor constraints going forward.

“These metrics, early successes if you will, give us some confidence of our compensation strategies, our retention strategy, and then the mix of our labor workforce should improve as we move through the balance of the year,” he said.

HCA’s strategy for rampant inflation was front of mind for investors on the call. The executives acknowledged that the system has felt early pressure here on its labor and supply costs but said that the organization is shielded from much of its impact in the short term due to the terms of contracts already in place.

Looking further, Hazen said the company has seen “early successes” in contract negotiations and expects payers “to appreciate the overall inflationary environment providers are in.” He said a mid-single-digit increase in commercial payer rates would be a “reasonable” expectation as HCA is in a relatively “competitive position” due to its size and the conditions of the market.

“Some renegotiated contracts have reflected more escalation in pricing than what we had seen in our past trends,” he said. “We’re pretty much contracted through 2022, obviously, but as we look to 2023 we’ll start to see some uplift in our contract pricing reflecting the new contracts. And then in 2024 we fully anticipate having a different trend on our pricing as a result of these renegotiations.”

Investors also polled HCA’s executives on the company’s current growth strategy, particularly in terms of the Federal Trade Commission’s intervention in a planned five-hospital purchase in Utah.

Hazen said the decision hasn’t thrown a wrench into the company’s overall merger and acquisition outlook. HCA is continually looking for in-market growth opportunities—particularly in regard to outpatient network development—and is “obviously interested in new markets” as well, he said.

Executives acknowledged that inflation has had an impact on HCA’s broader capital expenditure but said they weren’t yet ready to share specific numbers on its hit.