Victor L. Campbell - Senior Vice President R. Milton Johnson - Chief Executive Officer, President and Director William B. Rutherford - Chief Financial Officer, Principal Accounting Officer and Executive Vice President Samuel N. Hazen - President of Operations.

Darren Perkin Lehrich - Deutsche Bank AG, Research Division Frank G. Morgan - RBC Capital Markets, LLC, Research Division Gary P. Taylor - Citigroup Inc, Research Division Justin Lake - JP Morgan Chase & Co, Research Division Andrew Schenker - Morgan Stanley, Research Division Joshua R.

Raskin - Barclays Capital, Research Division Brian Zimmerman - Goldman Sachs Group Inc., Research Division Kevin M.

Fischbeck - BofA Merrill Lynch, Research Division Gary Lieberman - Wells Fargo Securities, LLC, Research Division Brian Tanquilut - Jefferies LLC, Research Division Ralph Giacobbe - Crédit Suisse AG, Research Division Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division Albert J. Rice - UBS Investment Bank, Research Division.

Welcome to the HCA Third Quarter 2014 Earnings 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 Senior Vice President, Mr. Vic Campbell. Please go ahead, sir..

Thank you, Martina, and good morning, everyone. Mark Kimbrough, our Chief Investor Relations Officer, and I would like to welcome all of you on today's call and those of who are listening to our webcast as well.

With me here this morning is our President and CEO, Milton Johnson; CFO and Executive Vice President, Bill Rutherford; and Sam Hazen, President of Operations. And I might add in case any of you missed our announcement yesterday afternoon, Milton Johnson has been elected by the HCA board to become Chairman of the Board effective December 31, 2014.

He'll obviously continue as CEO. Congrats to Milt. Before I turn the call over to him, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations.

Numerous risks and 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 made available later today. With that, let me turn the call over to Milton..

Thank you, Vic, and good morning. We hope each of you had an opportunity to review our third quarter 2014 earnings release issued this morning. I'll cover a few highlights then turn the call over to Bill and Sam to provide more details on the quarter.

We previewed our third quarter results on October 15, and our results today are consistent with that preview. We are very pleased with the performance in the quarter, which includes strong volume metrics, favorable service and payer mix, combined with effective cost management.

As you will hear later in the call, these improving metrics are broad-based across our markets. As a result and as part of our October 15 preview, we raised our 2014 adjusted EBITDA guidance to a range of $7.25 billion to $7.35 billion and EPS to $4.40 to $4.60 per diluted share. Health care exchange admissions continued to increase in the quarter.

We also saw significant reductions in our uninsured volumes during the quarter. Consistent with our second quarter, we believe approximately 2/3 of our adjusted EBITDA growth can be attributed to our core operations and approximately 1/3 to health care reform. Bill will provide more detail on health care reform in a moment.

However, as noted in our revised guidance, we now believe health care reform will comprise approximately 4% of our 2014 adjusted EBITDA growth, up from 2% to 3% in our previous guidance. Last quarter, we disclosed that we finalized exchange contracts in all of our Texas markets with UnitedHealthcare.

Today, we're announcing that we have also finalized exchange contracts with United for all of our major Florida markets. We believe we are positioned well as the exchange marketplace continues to evolve. Now moving to our recent credit market transactions.

On October 17, the company completed a $2 billion bond offering consisting of $1.4 billion of 5 1/4% senior secured notes due 2025 and $600 million of 4 1/4% senior secured notes due in 2019.

Net proceeds will be used to redeem the company's existing $1.4 billion 7 1/4% senior secured notes due in 2020 and to pay related fees and for other corporate purposes. The redeemed notes are the last of the company's outstanding bonds with more extensive high-yield so-called [ph] operating covenants.

The redemption will reduce the company's borrowing costs and provide increased financial flexibility.

We also expect to complete an amendment to our asset-based revolving credit agreement facility later this week, upsizing our borrowing capacity from $2.5 billion to at least $3 billion to take advantage of the growth in our eligible accounts receivable balance. Cash flow continues to trend positive.

In the third quarter, cash flow from operating activities totaled $1.128 billion, up approximately 25% from the prior year. Free cash flow was $431 million in the quarter.

Without giving the effect to the October bond offering and related redemption, total debt at the end of the quarter was $28.47 billion, and the ratio of total debt to adjusted EBITDA was 3.96x compared to 4.32x at December 31, 2013. This morning, we also announced the authorization of a $1 billion share repurchase program.

We expect the repurchases to be made from time to time in the open market or through privately negotiated transactions, utilizing our strong cash flow coupled with existing capacity under our revolving credit facilities. On the development front, I'm pleased to announce the acquisition of CareNow.

CareNow is one of the largest independent providers of urgent care, family practice and occupational health in the Dallas-Fort Worth market. In 2013, their clinics served approximately 9% of the Dallas-Fort Worth population. We expect to complete the transaction sometime during the fourth quarter.

The company also announced in September the acquisition of PatientKeeper, a company that provides an innovative technology platform that focuses on the physicians' online experience. Working in conjunction with the underlying EHR systems and other physician-based technologies, PatientKeeper provides a more efficient and elegant workflow.

We view both of these acquisitions to be highly strategic for the company. Finally, let me address the topic that's been on everyone's minds for the last several weeks, Ebola. We began tracking Ebola before its expansion to the United States caused a national emergency.

We donated $1 million to the CDC Foundation to aid with relief in West Africa, and we are pursuing additional donations of beds and other supplies. In a few moments, Sam Hazen will provide comments on HCA's Ebola preparation, processes and activities. I believe the past few weeks have provided U.S.

hospitals with an opportunity to improve preparedness planning for an Ebola threat. At HCA, our teams continue to assess and improve our processes to ensure high levels of safety for our patients and all members of the HCA team.

I would like to commend everyone at HCA who is working diligently to test, assess and reinforce the standards in place throughout our organization. With that, I will turn the call over to Bill..

We estimate net revenue to be between $36.5 billion and $37 billion versus our July guidance of $36 billion and $36.5 billion. We now estimate adjusted EBITDA to be between $7.25 billion and $7.35 billion. This is an increase from our July guidance of adjusted EBITDA between $7 billion and $7.15 billion.

EPS is estimated to be between $4.40 and $4.60, up from our July '14 guidance of $4 and $4.25. Capital spending remains the same at $2.2 billion. So that concludes my comments, and I'll turn it over to Sam for some additional commentary on the quarter..

Good morning. As mentioned earlier, our volume growth accelerated in the quarter as compared to the first half of this year. This acceleration was broad-based across most of the company's markets and was also broad-based across the various volume categories of our business.

Again, we believe it reflects a combination of solid execution of our growth agenda by our operating teams, improving macroeconomic trends in many of our markets and capital spending that has been invested both to increase access to our networks and to add operational capacity.

On a year-over-year basis for the quarter, 10 of our 14 domestic divisions had growth in admissions. All but 3 of our divisions had growth in managed care and exchange admissions. 13 of our domestic divisions had growth in both adjusted admissions and in managed care and exchange adjusted admissions.

13 divisions had growth in emergency room visits, and all divisions had growth in managed care and exchange emergency room visits. EMS transports and trauma volumes this quarter were up 4.4% and 8.9% respectively. Growth in inpatient surgery volumes was generally consistent across all divisions. 3 divisions were up in the -- let me back up.

All but 3 divisions were up in the quarter. Orthopedics, cardiovascular and oncology service lines had solid growth. Our hospital-based outpatient surgery volumes were strong. They grew by 3.8% with solid growth in most service lines. 9 divisions had growth in this category. Surgery volumes in our ambulatory surgery division were down 0.5%.

Deliveries for the quarter grew 2.7%. 10 divisions had growth in deliveries. Managed care and exchange deliveries grew 9.1%. All but 1 division had growth in this area. Neonatal admissions grew 8.9% in the quarter. Behavioral services admissions grew 9.7% in the quarter. Rehabilitation services admissions grew 12.4%.

And finally, average length of stay increased 1.8%, which reflects the increased acuity that was mentioned previously. HCA has a comprehensive growth agenda that we believe is driving results. We continue to invest in it at appropriate levels and we continue to leverage the best practices across our diverse markets.

As a result, we believe our local networks are positioned well to compete effectively in their respective markets while delivering high-quality care. Market share trends for the company for the 12-month period ended March 31, 2014, are generally consistent with past trends.

Market share grew by 15 basis points to slightly above 24%, with approximately 60% of our markets increasing share across most of the service line categories. Now let me say a few words about the company's preparation for Ebola patients.

We, like most health care providers, have redoubled our efforts across the company to make sure our hospitals and outpatient centers are prepared. Additionally, we have taken a closer look at both the lessons learned in the United States and the best practices from around the world on how to treat an Ebola patient.

In the event that we would care for an Ebola patient, we have put measures in place both to serve patient needs and to protect our employees and physicians.

Should a patient present with Ebola as a potential diagnosis, we will ensure complete isolation of the patient, and we will limit interaction with the patient to the minimal number of staff necessary, pending confirmation of the diagnosis.

As you may know, the CDC has been working toward each state designating specific facilities to provide care for patients with a confirmed diagnosis of Ebola. Although HCA has none of these centers, we will continue to work with state officials to support this process on a state-by-state basis.

As part of our plan, we have put processes in place to ensure availability of personal protective equipment and increase the training of our employees to improve their ability to use the equipment.

Next, we have increased our inventory levels of personal protection equipment, and our supply chain team has developed logistical procedures to move product where necessary. Finally, we have put a company-wide organizational process in place to institute structure, policies and procedures.

This process, which takes advantage of our scale, will allow us to support a facility if we have a patient encounter. With that, let me turn the call back to Vic..

All right. Sam, thank you. Martina, if you want to come back on, we'll start the Q&A process. [Operator Instructions].

[Operator Instructions] We'll take our first question from Darren Lehrich with Deutsche Bank..

Congrats to Milt. I want to ask about just the capital deployment strategy. You've obviously done a lot of buyback over the last couple of years. Just wanted to get a comment from you about buyback going forward.

Will you continue to have more of a bolus type of buyback plan? Or do you think we should expect this type of buyback and just have something authorized and you're opportunistic on a more -- a time-bought basis? And then if you could just maybe also comment about dividend and how that fits with your capital deployment strategy going forward..

Darren, this is Milton. Let me take that on the buyback. First of all, we're very pleased this morning to announce our $1 billion share repurchase. I think we have been very consistent over, really, recent years since coming back into the public markets in 2011 with our capital deployment strategy.

I think this is -- this announcement this morning is highly consistent with that. Our first approach, of course, is to reinvest capital back in our existing markets to continue to support our growth strategies across the -- across our various 42 markets. Second, we certainly look for acquisition opportunities. This morning, we announced 2 acquisitions.

Of course, nonhospital acquisitions, but we, as I said in my comments, I view as being very strategic to the company going forward. We're also looking at -- continuing to look at a few tuck-in acquisitions and hope to close, for example, the Citrus Hospital here, hopefully very soon.

And then we looked at beyond that, either dividends, share repurchase or debt repayment.

And I think, again, we've been very consistent that in this market where we're seeing attractive rates on our long-term debt, especially in our leverage ratio around the middle of the range that we have given at 3.5% to 4.5%, we're right under 4%, that we think that we're comfortable with the amount of leverage.

So then we look to this buyback opportunity. And as far as dividends, we would not rule that out, but I would not foresee in the near term a regular dividend. We have been paying special dividends over the past 3 years.

But with the change in tax laws affecting dividend payments, I believe share repurchase to be a more tax-effective method of returning cash to shareholders..

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

Regarding the public exchange growth for 2015, obviously, signing up United in all your Texas and Florida hospitals should be helpful.

But could you provide any additional color on your public exchange enrollment strategy for 2015 during the open enrollment period?.

All right, Frank. Bill, you want to address....

Sure. Hey, Frank, so as Milton said, I think our approach to 2015 is multipronged, clearly looking at participation in contracts in several of our markets that we talked about.

We continue to have our certified application counselors in our facilities and we are partnering and looking at -- and really stepping up our efforts with a couple of national agencies and outreach in our communities to help people gain access to resources around exchange enrollment, both in terms of scheduling community-based events as well as assistance in the enrollment effort.

So I think we'll become more active this year than last year in that effort, and we're optimistic as we approach the second year of the enrollment cycle..

And we'll take our next question from Gary Taylor with Citi..

I just wanted to go back to the Texas supplemental program, and I was trying to write everything down as -- and I may not have received it all. And also I'm a little stale, I think, on my 10-K disclosure.

But I just want to go to the bigger point of -- my understanding was a lot of the supplemental program also had a accompanying provider fee component to it. So there was a revenue amount that was substantially offset by a provider fee payments.

And then kind of the net EBITDA benefit from those supplemental programs was something much smaller, a couple of hundred million dollars a year sort of range.

So is that recollection correct? Could you kind of update us on what kind of the net impact you could be looking at if this particular program was discontinued?.

Yes, it's still early in it. So our reserve we booked in the quarter, really, is around an estimate on our carrying value receivables. There's really a lot of uncertainty around this inquiry.

We think the inquiry currently relates to the federal-matched portion of the uncompensated care program, which we estimate, as I mentioned in my comments, about half of our AR balance relates to.

So there are a lot of factors at play and a lot of variables we're having to give consideration to, including the fact it was previously approved, got a history of payments under the programs. And so all those kind of came into our thinking around this.

As I mentioned, we currently accrue, based on our history, about $35 million a quarter of revenues related to the federal match of the uncompensated care program. And that's what we've elected to discontinue recognizing for this year.

We're going to have to continue to monitor it, and it's really too early to make the call for the long-term consequences. But that's what our estimated impact is for the balance of the year..

So there's no reduction in provider fee that goes along with discontinuing that $35 million accrual?.

No, not -- this is Sam, Gary. Not at this time. I mean, we're constantly evaluating components of the program. They're not necessarily connected per se. And then you have a separate component of the overall waiver, which is the delivery system reform component, and that's somewhat separate as well.

And so we're very close to the program in all communities at all levels at this point. And anticipating the state and the federal government to get together shortly and hopefully resolve the questions that were raised in the review.

But at this point, there is no change in the structure of the program, and we will just have to monitor it routinely, as Bill indicated..

We'll take our next question from Justin Lake with JPMorgan..

If okay, I got one quick follow-up and then my question. So the follow-up is on Darren's capital deployment question.

The buyback authorization of $1 billion, would this include any special purchases like you did -- like the one you did from private equity? Or would that be a different pocket in terms of capital deployment?.

Justin, this is Milton. If we -- the authorization does permit the company to enter into privately negotiated transactions. So for example, I think the obvious question is if our sponsors decided to sell more of their ownership, the answer is we could use any portion of this authorization to buy back any portion of their offering..

So essentially, if you -- if the sponsors came and you had $500 million of this left, you would only be able to buy $500 million of the sponsor?.

Under this authorization, that is correct..

Okay. And then my question's on the core EBITDA growth, obviously, running much higher than initially guided to this year.

Just want -- just trying to think about looking out to 2015 and beyond, how should we think about this core growth in terms of sustainability and how management views it?.

Justin, this is Milton again. We're nearing obviously here in that fourth quarter. And 3 months from now, we'll be issuing our guidance for 2015. So I'll reserve our giving guidance about how we think about the long-term growth rate until we complete our work here in the fourth quarter as we budget 2015 and think about the impact.

Obviously, we have a lot of momentum here in 2014, but we'll reserve our estimates for 2015 until next call..

Justin, thank you. Appreciate you trying to get us into '15 guidance, there but....

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

So just -- with regards to your strong volume growth this quarter, can you provide maybe a little more details of the components of the strength there? Maybe breaking out between reform, maybe product line extensions and maybe more importantly, what you're seeing specifically around economically sensitive volumes.

How has that been trending versus year-to-date expectation?.

Sam, you want that one?.

I think when Bill mentioned the exchange volume and half of it potentially being newly insured, it's still a very small component of the overall volume equation. So it's related as a significant component of the overall growth. I'm struggling to get to that. And it's clearly having a positive impact on our payer mix as indicated in Bill's comments.

I think when I look across the volume categories of the company and you see fairly strong growth across just about every metric, I attribute that to a couple of things, and I mentioned that in my comments. First, I do believe the economy is improving.

We're seeing a number of HCA's markets with strong job growth, reducing uninsured levels and unemployment levels, and that's having an impact, we believe, on outpatient surgeries. We believe it's having an impact on obstetrics and the volumes that we're seeing there.

And we were seeing that, we think, generally across most service lines at some level, but those 2 in particular. And then when you look at the strategies of the company, which have been fairly consistent over the past few years, our execution underneath those strategies to create accessibility to HCA's networks locally is growing.

For example, the CareNow acquisition that we're doing is a very significant part of adding access to our DFW market and creating a new outreach into our network there.

We continue to invest in service line strategies where we're adding capabilities to our existing networks, allowing us to take care of as many services as possible if a patient needs more advanced care.

And then thirdly, the investment strategy of the company, where we stepped up our capital spending over the last 3 or 4 years to a very significant level, is having a positive impact on capacity, availability, technology and putting our facilities in a much more competitive position in the marketplace.

And the combination of those things, I think, are driving volume, driving market share for the company. And then our -- the execution of our teams is just very strong, and I'm proud of what they're doing. And I think the net of all those is a very positive accelerating volume picture for the company..

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

Just want to talk a little about the surgery volumes. I think I heard the numbers on the inpatient and then on the outpatient side were both up, but I think you said ASC volumes were actually down 0.5%. So I'm just curious in terms of what you think is going on there.

Is there some sort of ACA impact that doesn't translate to the stand-alone ASCs? Or maybe any color on surgery?.

Well, we have not seen as much Affordable Care Act volume inside of the Ambulatory Surgery Divisions as we've seen inside of the hospital. The exchange side of the equation is a little less than what our hospitals are seeing, but we are seeing some exchange-level activity.

The ambulatory surgery center division volume decline is really centered around a handful of centers that have had some dynamics, whether it's physician departures or competitor facilities open up.

If you look across the portfolio of the 120-or-so surgery centers that we have, more than half of them, almost 2/3 of them are up, but 1/3 of them are down. And of that 1/3, there's some significant declines related to very specific events that aren't really broad-based events and consistent across our markets.

We continue to invest in our ambulatory surgery center strategy through incremental acquisitions, through new site development, where we've actually replaced and created new centers. And it's a very viable strategy for HCA with respect to efficiency and service and physician alignment, and you will continue to see the company invest in it.

But we are seeing a little more accelerated growth inside of the hospitals. And I'm not sure I can point to specifically why that is, other than we've had a handful of these centers that have struggled, and they've struggled, like I said, for very specific reasons..

Is it possible that the payer mix and the ASC is just typically significantly better, and so you're just not seeing that same level of additional capacity to take in, for example, Medicaid expansion, right, which would not be necessarily attractive for some of the commercial..

Well, the ambulatory surgery center division payer mix is slightly better than our hospital-based outpatient surgeries, but not significantly different. But you're right, Medicaid is not seen at a significant level inside of our Ambulatory Surgery Divisions as compared to the hospital.

And so in those states where we've seen expansion, we're seeing some Medicaid volumes in our outpatient surgery departments of our hospitals but not in the Ambulatory Surgery Division..

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

I was wondering, can you give us a bit more information on the strategic thinking around the CareNow acquisition? And is this the type of acquisition we should be expecting to see more of going forward?.

Sam?.

Well, in DFW in particular, the CareNow acquisition is very strategic. It is a unique company in that they're focused on quality. They're focused on patient service and convenience. And then their geographical alignment with HCA in the DFW market is very good.

I think 20 of their 24 centers are within 5 miles of an HCA hospital, so it creates a broader network of offerings inside the company in that particular market. Additionally, we think because their unique model, their volumes per center and their financial results per center, quite frankly are best in class from what we've been able to see.

And we're hopeful that we can replicate that model in other markets where we can complement our networks with urgent care centers in a larger way. Now we haven't fully vetted exactly how we're going to do that as of yet.

But we do see possibilities with that acquisition and the capabilities of the management team to expand those offerings into other markets. The urgent care business is very fragmented. We do see possibilities for more acquisitions in that front as we work through our market strategies and so forth.

Today, the company operates with the CareNow acquisition over 60 urgent care centers in various markets, with some being operated in a joint venture structure, others being wholly owned.

So it's a very significant access point for the company and a very high demand kind of center for a lot of our patients who like the accessibility and the convenience and the cost of urgent care centers.

So it does expand the offerings of HCA and create capability in the company that we're hopeful we can leverage into a broader strategy that fits our market needs..

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

I was just wondering if you could just go into why you raised the health care reform benefit as much as you did in your guidance. Because it looks like the reform volumes are growing, but you kind of said that you thought they would continue to grow but slow down.

It kind of seems like that came in line with what you thought was going to happen in the -- at least on the exchange side in Q3. It sounded like the rates are about the same and the Q2 is about the same.

So what was driving the big increase in the reform benefit?.

Bill?.

Yes, so we did see growth third quarter versus second quarter as I mentioned in my comments. With almost 7,800 admissions in the third versus 5,500 in the second, so we saw continued growth. Month-over-month progression is still slowing. Our 4% kind of guidance is really the full year guidance, knowing first quarter was relatively soft.

And we know the current period is running a little bit higher than that. So as we project out, really, the remaining 3 months of the year on our current volume run rates and look at our model, it gets us really close to that 4%, maybe a little bit north.

The 4% is really a result of we had a solid first quarter with the contributions, but we saw that grow in second quarter over first, third quarter over second, and we're pretty comfortable with that revised guidance..

And Bill, I think -- I'm sorry. Go ahead, Kevin..

I was going to say so was the Q2 reform guidance just kind of taking that 5,500 and assuming that stays flat, and now you're saying it's 7,800 staying flat in Q4? Is that the way to think about it?.

Yes, so -- yes, that's good point -- as the second quarter, we did project some moderation of the growth for the balance of the year, and it did go a little north of that in the third quarter. And we are still projecting some moderation of that month over growth for the balance of the year, and we'll see how that unfolds..

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

Was interested to get your thoughts on Medicaid expansion, and what states you're watching and what states may be you're most hopeful or even optimistic in? Specifically maybe your thoughts on Tennessee, Virginia and Florida?.

All right, Gary, this is Vic. I'll take that. I think we've got 5 states you all know that have expanded. It appears Utah will be next, so we would expect Utah to come on. Indiana was in the mix, but it appears they have withdrawn their application.

Tennessee, we would be hopeful going into next year, post the election, that there would be an opportunity here. Time will tell, but I think that would be maybe the next most likely to consider it. Florida, we'll just have to wait post-election and see what happens in terms of the new governor and in terms of the state legislature.

And again I say new governor, whether it's the existing governor or a new governor, I think both support it, so the question is really the legislature down there. And I don't want to put odds on that one, but we would hope that they would see the benefits of that reform..

We'll take our next question from Brian Tanquilut with Jefferies..

Just a question on reform again and not trying to get into guidance.

But as you go through the budgeting process for next year, qualitatively, how are your guys thinking about reform? And how different was that -- for '15 and how different was that for '14 as you say, benchmark against CBO's exchange enrollment estimates? Or just what you're seeing on your current run rate on the exchange enrollment?.

Yes, thank you, Brian. Good question. So as we were going into '14, we were working obviously with a lot of unknowns. We had 4 or 5 kind of key variables as the input. One, what did we think the enrollment was going to be in the exchanges? And we all know the rocky start in January.

We're still sitting with a low amount and saw the surge in February and March. We were keying off early with CBO estimates, and the enrollment will likely do the same as we approach the '15 planning until we gain more data points.

The other variable we were really dealing with was of that exchange enrollment, how much would be newly insured? And there was a whole lot of estimates in the marketplace with what that number would be. 9 months into it, we're a lot better informed with our own data about that exchange volume that's newly insured.

And so get a little bit more precision, if you will, on that estimate based on at least our history to date. And then the Medicaid expansion impact was a variable of how quickly that would affect payer mix and the uninsured volumes.

So we'll basically -- and our plan now, is use the same variables and the same model but update our thinking with our experience and with better marketplace information.

So it's why I've mentioned in the earlier ones we're going to be a little more assertive in our efforts to help people in our communities gain enrollment and access to community resources. And the enrollment variable is a key number for us as we think about the open exchange period coming up.

And we think with the Medicaid expansion and the previously insured percentages, then I think will be 9 months, 12 months better data points in our assumptions for '15..

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

Can you maybe talk about the managed care book? What rates you're capturing for 2015? How much is negotiated for next year? And then if you're seeing any changes in your markets in terms of payers narrowing networks or looking for more risk arrangements?.

Sam's got that one..

We are 80% contracted for 2015 and 40% contracted for 2016, and actually about 20% contracted for 2017. All of our terms are largely consistent with our previous terms around both pricing and structure within our contracts. There are some incremental changes here and there to pay-for-performance provisions and so forth.

But, largely in our commercial book, very consistent approach by HCA as well as most of the payers.

Obviously, the exchange, as we've indicated, is slightly different and more difficult to quantify in the same way as our commercial book because there are new entrants into the exchanges each year and identifying exactly the participation in some of the new contracts related to the exchange is a little bit more difficult than the commercial side of the equation.

And then also on the managed government side, our terms and our percentage completion is similar to past patterns and also similar to the completion rate that I just gave you on the commercial side.

We think the company is well positioned for any kind of changes as they evolve through our core strategy of making sure we have a very operationally excellent and accessible provider network. Additionally, we're seeing the marketplace move locally, not nationally, because of different dynamics within each of our markets.

And so as we process that, it gives us an opportunity to learn to be strategic about those different market experiences and think about it more globally. But for the most part, it's not changing in any significant way as we move into 2015..

We'll take our next question from Whit Mayo with Robert Baird..

I just wanted to go back to the ER comments that you made with respect to reform. I just want to make sure I got some of these numbers correct.

Did you say that there were 27,000 exchange ER visits this quarter and 19,000 last quarter?.

Yes. Whit, this is Bill. That's correct. That's what I said..

Yes, so I know this is kind of dangerous, but that would mean that you're exchange mix just with respect to ER went from 1% to maybe 1.5% of total ER.

And if I assume that 24% of those old ER visits were uninsured, it might suggest that about 6% of your uninsured ER visits are now coming through an exchange product, which is up a lot since last quarter. And I just want to make sure that I'm thinking about the trajectory of the volume correctly and why that wouldn't likely continue going forward..

Well, 2 things. One, the stats are correct. We had 27,000 exchange EDs in the third quarter. It was up from 19,000 as we've said, both on the inpatient is growing. Your math on the percentage of our exchange volume in total is about right. It's fairly similar with our inpatient admissions.

We've not done a study of those emergency room exchanges and how much were newly insured, so its impact on the uninsured, but it's fair to assume until that it's fairly comparable rates. And it really done flow through rate of what that would mean. But as I mentioned in my comments, we've seen the uninsured emergency room business drop from 24 to 20.

So we think those trends are embedded in that exchange volume as well as some of the Medicaid expansion activity. And like I said, we haven't got into '15 projections of what that would be. But our projections for the balance of the year are really holding that pretty steady with some moderate growth, so that's the best way I can....

Our Medicaid payer mix in the emergency room has grown more than our exchange payer mix has grown in the emergency room. So to Bill's point, at 1.5% of total emergency room visits, we've seen a larger piece in Medicaid growth than we have in the exchange side.

And that's happened, as he mentioned, in both expansion states and some in non-expansion states..

We've got time for one last question..

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

Since the last question, I'm going to get one clarification and then one question..

Just for you, A.J..

There you go. The clarification, I think I've gotten some questions emailed to me about this, so I wanted to clarify it. Milton had said that I think in response to a question, that if you guys bought $500 million, then you'd only had $500 million to purchase if there was a private equity transaction or something otherwise.

I just want to clarify, if I'm reading between the lines of what you're saying, that will be under that authorization. But you're also leaving open the possibility that you could quickly go back to the board and do more if you thought it was in the company's interest to do that. I want to make sure I just clarify that..

A.J., that would be an option that we would have. I was answering a particular example I think I was given. And if we had $500 million left in the authorization, that's all we could use on that authorization.

But there would be -- we would have the option, if we thought it was appropriate, to go back to the board and to seek more availability and more authorization..

A.J., thanks for raising that clarification. All right, we'll let you have your other question now..

All right. I guess I was just going to ask -- I know lots of times, obviously, with the focus right now on the top line and on the benefit of the reform, maybe some of the cost initiatives take second -- backseat. But I just wondered if there's anything supply-wise, other operating expense initiatives you'd talk to.

And then also just in the nursing side, is the growth that you're seeing putting any pressure on productivity rates or vacancy rates or turnover rates? Give us sort of some quick comments on some of the big cost buckets and what you're seeing..

All right, Sam, try to get through that before lunch if you could..

pharmacy and surgery, in particular, are areas where we are moving our supply chain deeper into our operations and creating a better controlled system for purchasing, and at the same time freeing our teams up to interact with our physicians and other clinicians to drive improvement in pharmacy utilization and other type of clinical utilization.

And that is helping us identify and move our agenda. On the other expenses, most of our other expenses are fixed in nature. And so as we can drive more volume and we can drive more revenue growth, we tend to create some margin expansion in those areas. But the company is focused on leveraging its scale where it can.

We have a oneHR initiative we're calling that where we're consolidating our human resource function, which we believe is going to create some synergies and at the same time give us better visibility into our labor cost, which we think will drive some incremental improvement.

And then as I've mentioned in previous calls, A.J., we've also deployed our performance-based improvement teams from the corporate office to the divisions. We think that's going to enhance our ability to execute on best practices, identify continual improvements in performance improvement initiatives in our key areas of our facilities.

And then the last thing I would say is we're getting better in HCA at using internal data to benchmark and identify ways to marry up clinical improvement, operational efficiency and physician engagement, and that's part of this operational excellence agenda that we've got to position our provider networks to be very effective.

So we're very pleased with where we are. We think we've got reasonable initiatives in place to manage the trends on a go-forward basis, and we'll give you more detail on that as we move into 2015..

All right, A.J., Sam, thank you. Thank everyone on the call, and we will see you soon..

That does conclude today's conference. We appreciate your participation. You may now disconnect..