Victor Campbell - Senior Vice President Milton Johnson - Chairman and Chief Executive Officer William Rutherford - Chief Financial Officer & Executive Vice President Samuel Hazen - President, Operations.

Joshua Raskin - Barclays Capital Kevin Fischbeck - Bank of America Merrill Lynch Matthew Borsch - Goldman Sachs Sheryl Skolnick - Mizuho Securities A.J. Rice - UBS John Ransom - Raymond James Frank Morgan - RBC Capital Markets Whit Mayo - Robert W.

Baird Andrew Schenker - Morgan Stanley Brian Tanquilut - Jefferies Ralph Giacobbe - Citi Gary Taylor - JPMorgan Brian Wright - Sterne Agee Paula Torch - Avondale Partners.

Welcome to the HCA Third Quarter 2015 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 the Senior Vice President, Mr. Vic Campbell. Please go ahead, sir..

All right. Cassandra, 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 including those of you listening to our webcast.

With me here this morning is our Chairman and CEO, Milton Johnson; Sam Hazen, our Chief Operating Officer; and Bill Rutherford, our CFO and Executive Vice President. Before I turn the call over to Milton, let me remind everyone that should today's call contain any forward-looking statements, they're 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.

Several 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.

On this morning's call, we may reference measures such as adjusted EBITDA and net income attributable to HCA Holdings, Inc., including losses and gains on sales of facilities, losses on retirement of debt and legal claims which are non-GAAP financial measures.

A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Holdings, Inc. to adjusted EBITDA is included in our third quarter earnings release which I hope all of you have seen this morning. The call is being recorded, a replay will be available later today.

So with that, I will turn the call over to Milton..

All right. Thank you, Vic and good morning to everyone joining us on the call and the webcast today. I hope everyone has had a chance to review the press release we issued this morning. Following my remarks, I will turn the call over to Bill and Sam to provide more details on the results of the quarter.

Adjusted EBITDA for the third quarter totaled $1.815 billion compared to $1.828 billion in last year's third quarter. Adjusting both periods for EHR incentive income, share-based compensation and RAC Medicaid waiver adjustments, adjusted EBITDA would have increased 3.5% over the prior year.

The results of the third quarter fell short of our internal expectations primarily due to higher than expected labor cost and to a lesser extent and unfavorable payer mix shift and increased drug cost. As we analyze the quarter, we were extremely pleased with our revenue growth in the quarter.

Reported revenue grew 6.9% over the last year's third quarter. Revenue growth was primarily driven by our volume growth as we reported strong same facility growth in admissions, adjusted admissions, emergency room visits and surgery cases in the face of tough comps for last year. Volume growth was broad-based across our markets and service lines.

Our volume growth agenda is comprehensive and consistently delivers solid results. This speaks to the positive characteristics of our urban markets and the execution of our strategies to invest capital on additional inpatient and outpatient capacities and to the development of clinical capability across our service lines.

Based on expected growth in demand in our markets and continued expansion of our market share, I believe we will continue to see opportunities for volume growth. On the cost side, we reported higher labor expense than we have seen in recent trends.

Labor productivity and contract labor presents opportunities for improvement and certain management actions have been implemented while others will continue to be implemented to address productivity and contract labor expense. Bill and Sam can provide additional details on our labor cost and our actions to address in the Q&A. Now moving to cash flow.

Cash flow from operations in the third quarter totaled $1.101 billion and our debt to adjusted EBITDA leverage ratio was 3.84 times.

This morning we announced that the board has authorized an additional share repurchase program for up to 3 billion of the company's outstanding shares which would be in addition to the 1 billion authorization that we announced in May which currently has approximately 235 million remaining.

The company has indicated in the past that its first priority for use of cash would be to pursue organic growth and reinvest in existing markets. Second, we look for M&A opportunities and then third, we consider based on market conditions, either debt repayment or share repurchases.

Today's announced share repurchase authorization is consistent with its capital deployment strategy. During the quarter the company repurchased 5.1 million shares of its stock at a cost of $446 million. Year-to-date, through October 23, 2015, we have repurchased 22.6 million shares at a cost of $1.765 billion.

In fact, since October 28, 2014, the company has repurchased approximately 36.7 million of its shares at a total cost of $2.765 billion. And then finally I would like to congratulate Dr. Jonathan Perlin on his election to membership into the National Academy of Medicine.

His election is recognition of his many contributions to healthcare and his commitment to improving patient care. Now I will turn the call over to Bill..

Thank you, Milton and good morning everybody. I would like to move right in to some of the areas affecting the company's performance for the quarter then I will run through some of our operating statistics and finish with an update on health reform.

When adjusted for the RAC settlement and Texas waiver accrual adjustment we recorded in the third quarter of last year, as well as share-based compensation and high-tech, on a year-over-year basis the company recorded a 7.2% revenue growth and a 3.5% adjusted EBITDA growth in Q3 of 2015 when compared to Q3 of 2014.

Also when adjusted for these items our adjusted EBITDA margin declined [7] [ph] basis points for the quarter as compared to last year. There are three primary areas I would like to discuss that affected the company's performance. First, we carried more labor cost in the quarter compared to our plan.

There are primarily two items that impacted our labor cost. We saw an increase in the use of contract labor during the quarter. Our contract labor expense was up $55 million or 36% as compared to the third quarter of 2014. We have seen growth throughout the year but it did accelerate during this quarter.

This increased use of contract labor is used to fill in for staff vacancies that occur because of higher turnover rates and needs we have to serve the increased volume. Because of the premium we have to pay for these contract labor resources, we estimate this issue had about a $25 million impact on the company's year-over-year performance.

The other labor observation I will call out is some productivity declines we experienced in the quarter. In essence we didn’t achieve the operating leverage we had anticipated from the volume growth. We did see this developing in the quarter and our management teams have already begun necessary adjustments.

We estimate this issue had about $25 million impact on the company's performance for the quarter. The second area that impacted our results in the quarter is the continued increases in pharmaceutical costs. Our pharmacy cost in the third quarter of 2015 were up in total just under 13%.

When we adjust for borrowing growth, we estimate the company had about $15 million higher pharmacy cost due to price increases for certain classes drugs. We have seen multiple price increases for a small number of drugs which primarily relate to single manufactured pharmaceuticals.

We have various strategies we are deploying to attempt to offset these cost. And the third area is we saw an increase in our uninsured borrowings in the quarter. Recall, we saw this developing in the second quarter.

In Q3 of this year, our uninsured admissions were up 13.6% as compared to Q3 of 2014 and uninsured adjusted admissions were up 8.8% over the prior year. For perspective, this uninsured admission growth equates to roughly 4,400 admissions. These results were generally broad-based across our markets.

Given our presence in Florida and Texas, the uninsured growth in these two states accounted for just under 75% of the uninsured growth for the company. We believe there are a couple of drivers of this uninsured growth. One is, we saw a slowing of Medicaid conversions in the quarter. That is uninsured patients that become qualified for Medicaid.

We believe state processing issues in both Texas and Kansas impacted a number of Medicaid applications that were reviewed during this quarter. And we believe this accounts for approximately 25% of the uninsured increase. We also saw an increase in the number of people previously registered as insured that were converted to self-pay in the quarter.

For instance, we saw 480 patients who were previously registered as health exchange convert over to self-pay in the quarter. We believe this is likely due to non-payment of premiums. Adjusted for these two items, we saw an underlying growth of uninsured patients who presented during the quarter of about 6.5%.

And most of this growth we attributed to our 6.2% growth in uninsured emergency room business. The impact to the company of this uninsured volume increase is the incremental variable cost we have to serve these patients.

We estimate we carried approximately $20 million of incremental cost to the serving of this uninsured volume growth as compared to the prior years. So we believe these three areas are the primary driver of the company's performance relative to our plan for the quarter.

Our teams across the company are actively addressing these and other areas to counter some of these trends. As Milton indicated, we were pleased by our topline performance and I will next move into a summary of some of our volume statistics.

As we reported, the third quarter -- in the third quarter our same facility admissions increased 2.9% over the prior year and equivalent admissions increased 3.6% against some fairly difficult comps from last year. Sam will provide more commentary on the drivers of this volume in a moment but I will give you some results by payer class.

During the third quarter, same facility Medicare admissions and equivalent admissions increased 2.4% and 3.1% respectively. This includes both traditional and managed Medicare. Managed Medicare admissions increased 8.9% on a same facility basis and represents 33% of our total Medicare admissions.

Same facility Medicaid admissions and equivalent admissions increased 3% and 4.9% respectively in the quarter. Managed care and other which includes exchange admissions increased 1.4% and equivalent admissions increased 1.8% on a same facility basis in the third quarter compared to the prior year.

Same facility emergency room business increased 5.8% in the quarter compared to the prior year. Same facility case mix or intensity of service or acuity increased in the quarter 0.7% compared to the prior year period. Same facility surgeries increased 1.4% in the quarter.

The same facility in-patient surgeries increasing 1.6% and outpatient surgeries increasing 1.2% from the prior year. Same facility revenue per equivalent admission increased 1.9%. Adjusted for last year's RAC and waiver adjustments, same facility revenue per equivalent admission increased 2.2%.

Same facility managed care and other including exchanges, revenue per equivalent admission increased 5% in the quarter. Same facility charity care and uninsured discounts increased $525 million in the quarter compared to the prior year.

Same facility charity care discounts totaled $914 million in the quarter, a decline of $117 million from the prior year period. Our same facility uninsured discounts totaled $2.755 billion or an increase of $642 million over the prior year period. Let me touch briefly on cash flow.

We had another strong quarter with cash flows from operations totaling $1.101 billion. Year-to-date cash flows from operations were $3.176 billion or a 12.6% increase from prior year. At the end of the quarter, we had approximately $2.586 billion available under our revolving credit facilities.

And debt to adjusted EBITDA was 3.84 times at September 30 of '15 compared to 3.96 times, December 31, 2014. And lastly, let me touch on health reforms. In the third quarter, we saw 11,445 same facility exchange admissions as compared to the 7,720 we saw in the third quarter of last year or a 48% year-over-year growth of exchange activity.

Our Q3 volume is in line with our expectations and comparable to the 11,560 exchange admissions we served in the second quarter of 2015. We saw 40,200 same facility exchange ER visits in the third quarter compared to just over 27,000 in the third quarter of 2014 and 44,740 in the second quarter of 2015.

Based on our look back of previous coverage, we still estimate about 40% of these admissions were uninsured prior to health reform. When we roll all the components of health reform that we could track, we currently estimate health reform contributed to just under 6% of adjusted EBITDA for the quarter.

So that concludes my remarks and I will turn the call over to Sam for some additional comments..

Good morning. I am going to concentrate my comments on a little bit more detail around our volume for the quarter. As mentioned earlier, volume growth was solid in the third quarter. We believe this performance continues to reflect growing demand for healthcare services in HCA markets and further gains in market share for the company.

We believe the gains in market share have been driven by combination of solid execution of our growth agenda and increased capital spending that has been invested to improve access to our networks and to add operational capacity.

Our growth in volume was broad-based across most of the companies markets and it was also broad-based across the various service lines of our business. On a same facility, year-over-year basis for the quarter, all but one of our 14 domestic divisions had growth in admissions and growth in adjusted admission.

All domestic divisions had growth in emergency room visits, seven divisions had growth in managed care and exchange admission and nine divisions had growth in adjusted admissions for these payer classes. Managed care and exchange ER business grew by 3.5%. 12 divisions had growth in emergency room visits for these payer classes.

Nine divisions had growth in inpatient surgeries. Surgical admissions accounted for 27.3% of total admissions for the quarter, consistent with the third quarter of the previous year. This quarter is the tenth straight quarter with growth in inpatient surgeries.

Ten divisions had growth in hospital-based outpatient surgeries which were up 0.8% for the company. Hospital-based outpatient surgical volumes have grown in nine out of the last ten quarters. Surgeries grew by 1.8% in our ambulatory surgery division. Surgical growth was strong in orthopedics, neurosciences and cardiovascular service lines.

Other categories of our inpatient business were strong also. Deliveries for the quarter were up 0.9%, managed care and exchange deliveries were up 5.7%. Neonatal admissions grew 1%. Behavioral health admissions were up 7.4%.

Rehab admissions were up 9% and our average length of stay grew by 1.6%, reflecting the higher case mix and acuity of our admissions. Market share trends for the company's inpatient business for the 12-month period ended March 2015, were slightly improved over past trends. Our market share grew by 31 basis points.

As a result, the company's composite market share is at 24.6%. Approximately 79% of our market increased share and gains were achieved across most service line categories. Overall, inpatient demand across HCA markets continued to show sequential strength during this period.

Demand growth accelerated in our markets in each of the last three quarters of 2014 and the first quarter of 2015 with the first quarter showing growth of 3.9%. Commercial demand in HCA markets was stronger for this period with an increase of almost 5%. We believe inpatient demand in both the second and third quarters of 2015 were also strong.

We will report on these quarters when the data is available. So with that, let me turn the call back to Vic for questions..

All right. Thank you very much. Cassandra, if you could come back on and let's take questions..

[Operator Instructions] And we will go first to Josh Raskin of Barclays..

Appreciate all of the color on the uncompensated care. But I guess first question on, or my only question, will be on physician compensation. And I'm just curious, are you seeing any increases in cost to recruit or retain physicians? And maybe if you could speak specifically around the ED that will be helpful as well..

Sam will take that..

Okay. Yes, let me answer this. And let me frame our physician discussion a bit. We have about 37,000 active participants on our medical staff, physicians. Of that, about 10% are employed by HCA. Our employment numbers on a year-over-year basis are up about 15%.

About 40% of that is related to the acquisition of the urgent care company in Dallas, Fort Worth. So we are up roughly 7% to 8% on employees positions. That trend is generally consistent with the previous two years and so we continue to add to our medical staff both from the standpoint of employed positions as well as affiliated positions.

Our medical staff in total has grown about 2.5% so far this year which is a really good number for the company. And so we are not seeing anything unusual with respect to physician compensation elements inside of our business. With respect to the emergency room specifically, we do have a number of companies that we work with across the country.

We have various relationships with them. But for the most part, that component of our business is managing at a normal trend and we are not seeing any kind of unique changes to our relationships with those organizations. Nor are we seeing it in anesthesia or radiology or any of the other hospital based areas.

So that issue is really not presenting a significant challenge to HCA..

And we will go next to Kevin Fischbeck of Bank of America..

I just wanted to dig into the cost issues a little bit. As far as the labor costs go, it's a little bit unusual for me to think about needing temporary labor and losing productivity. So if you can just give a little bit of color about what exactly happened there.

And then how much of this you think that you have addressed for Q4 and how much of this do you think you've addressed for 2016? I guess, specifically labor costs but if there are any savings on the pharmacy or anything you can do on mix, that will be helpful as well..

All right. Kevin, thank you.

Sam?.

Okay. Let me try to give as much color as I can on our labor spend and I want to start with contract labor. And I think there are a couple of macro issues that we are sorting through that are really difficult to specifically ascribe anything to but I think they are reasonable assumptions.

I mean we do have an improving economy as we have indicated across most of HCA's markets and we think that is having some effect on our overall labor equation. It's pocketed in some markets and more significant in others, but nonetheless it is having some effects we believe and we have been indicating that as a potential issue.

Is it material at this particular point in time, I don’t think it is. I think it's a manageable event. The other issue is, within certain service lines we have seen significant competition in new supply.

And that’s especially relevant in the emergency room where we have seen difficulties in recruiting emergency room nurses and having to use contract labor to service our emergency rooms. But the specific issues for HCA related to contract labor are really three-fold. One, we have seen an increase in turnover, nursing turnover in the company.

It was running last year about 17.5%. It's trended up to about 19%. So that’s created some challenge for us and we have had to use some contract labor to deal with that. The second thing is, we have sustained very strong volume across the company throughout the year and that’s requiring some additional staffing in order to service that volume.

And then we have had a few recruitment challenges and some minor transition issues we think are temporary with respect to the rollout of our One HR model. And so that’s contributed to the growth in contract labor within our nursing ranks. Last year about 6.5% of our nursing spend was in contract labor. This year it's about 8.7%.

So we have seen fairly sizable increase and that has been accelerating a little bit throughout the year as Bill indicated and some of this started last year. So what we are trying to do on the contract labor side specifically, is really focus on improving our turnover metrics.

And we think we have a reasonable plan for being able to do that and some early indications of some positive indicator. The first thing is really related to better onboarding and support for new grads. We hire a lot of new graduate nurses and they have a tendency to turnover a higher pace if they are not supported properly.

So we have got two or three different programs that we are utilizing to deal with the turnovers that we are seeing with the new graduate nurses.

There is nurse residency programs that we are using and we are also leveraging our own internal registry company, Workforce Solutions, to sponsor certain programs and create a better environment for our new grads. The second thing that we are doing is streamlining our recruiting process a bit to get the right nurses on the floor at the right time.

And I think we have made some adjustment as we have moved through our One HR rollout to improve that and that’s going to yield some benefit. And then finally, we have increased our training of our managers. We have got some better metrics and even greater accountability around turnover.

And where we need to, we have adjusted wages and we will continue to do that in isolated cases. The good news here is this, and this is part of the productivity challenge that we experienced. We actually have 750 additional nurses in the HCA pipeline right now that are related to graduate nursing programs and they are going through orientation.

That is a very significant increase over last year when we had about 2,400 at this time. So we are up to almost 3,100 from 2,400. And we think that’s going to create some opportunities to reduce or at least moderate the growth in contract labor. But those graduate nurses create a part of the productivity problem that we had in the quarter.

Our productivity was probably off about 0.7% as you look at FTEs per adjusted occupied bed. That represented about 1,500 FTEs, if you will. So about half of those were attributable we believe to the onboarding and the orientation of graduate nurses.

The other area that has contributed to some of our productivity challenge has been the acceleration of initiatives in the company to advance our growth position and our competitive positioning within the marketplace.

We have numerous field base initiatives that are centered on positioning the company for growth and we think those make a sense over the long run, but unfortunately they have ramp up, startup cost and so forth that create a little bit of a productivity drag on our overall metric. We have a few other corporate initiatives that you have heard about.

Whether they are in clinical IT or in One HR, that are creating a little bit of a challenge for us in the short run and we think those will phase out over time. And then finally some of our startup hospitals and new acquisitions have created a little bit of a dislocation with respect to HCA productivity versus the new hospital productivity.

Having said all that, we have refocused and redoubled our efforts to make sure that our systems are working properly, that our scheduling mechanisms are precise and we saw some indications of improvement mid-quarter in September using that as a point of reference.

We have significantly improved over August and July as it related to typical productivity measures reflecting some of these graduate nurses coming off orientation and at the same time making sure we didn’t have any mistakes, if you will, in our overall management.

So we are confident that the company is doing the right thing with respect to the adjustments that we need to make. We are also doing the right thing with respect to hiring nurses and making sure that we can replace them, contract labor with permanent nurses.

And we also believe we are doing the right thing by executing on these different initiatives that are preparing the company for success down the road as opposed to ignoring those or putting those particular initiatives off. So I think that’s a long-winded answer.

I know that’s on a lots of peoples mind but I want everybody to understand how we are thinking about it and what we are doing to manage it as an organization..

Sam, thanks. Kevin, thank you. Just let me add that, as you can clearly hear from Sam's description, we clearly understand the issues in the quarter with respect to labor cost. I can tell you the organization is highly focused on making as many corrective actions as possible, as quickly as possible. Productivity, we can react to that more timely.

Contract labor, more of a mid-term, intermediate term and we expect to make short term improvements. But to get back to where we were may take more of an intermediate term but we are definitely understanding issues and I think we are doing everything reasonably possible to address them..

And we will go next to Matthew Borsch of Goldman Sachs..

Yes. Maybe a high-level question if I could, and I'm not expecting that you have all the answers here. But if you look at the exchange attrition that you saw in the quarter.

Number one, I'd sort of be interested in how you think that compares to a year ago? And number two, at a higher level, is there something that's brewing here that may be wrong with the perception of the value of health coverage albeit even very subsidized, that people who had coverage before aren't paying the premiums but are showing up in the emergency room for care that presumably most of that is going to be written off given limited ability to pay.

Just curious, your thoughts on that as you look ahead to next year and what to expect from the exchange enrollment?.

Thanks, Matt and I think Bill wants to....

Yes. Let me address piece of it and Bill may add some more detail and color on this. But keep in mind that the benefit of health reform is still materially in line with our expectation for the year. And we still see the upside of reform and we saw growth in the exchanges in the third quarter of this year over the third quarter of last year.

So we are still seeing solid growth. Now the issue of seeing some reduction in terms of lives in the exchanges, is realty as well. I don’t have data through the third quarter, I have CMS data through June where I can compare the number of lives in the exchange as of end of March as compared to end of June at 2015.

And there is a decrease at the end of June. Nationally it's about 2.3% fewer lives in the exchange and for HCA states it's about 3%. So we are seeing -- and most of that is because of Florida. Florida has among the highest disenrollment numbers as far as percentage. Although still a very high number enrolled in exchanges in Florida.

So that’s probably a piece. It's hard for us to quantify because I don’t have this information by market, I have got it by state. But we do see some reduction in covered lives and again that’s through the end of June. With all that being said, reform is still playing out as we expected in terms of impact of HCA's earnings.

And Bill, if you need to add?.

Yes. I will just try to add. We did go back and look at last year to see whether that changed. We think the growth of that 480 admissions has grown about 320. So roughly 130 or so in the prior year. So it moved up.

If you look at that as a percentage of our total exchange activity it’s roughly 3.5% which may fall in line with some of those macro studies that we see..

And we will go next to Sheryl Skolnick of Mizuho Securities..

Thank you very much and appreciate all that, especially the passion with which Sam describes what he is doing to fix the labor cost issue.

One of the things you also attributed to, and good job on that, thank you, one of the things that you also attributed the weakness in the quarter on the EBITDA line to, but I'm not getting that sense here, is to payer-mix. And in particular either a slowdown or clearly not a decline but some sort of slowdown in managed care.

And I'm wondering if we can explore that a little bit, especially given the statistics you gave with a 48% increase in exchange related managed care lives year-over-year and very strong components of revenue from managed care and clearly you're still able to get pricing there.

But can we explore that issue? And if it's not as big a factor as you perhaps thought it was on the preview, give us some comfort as to why this external issue isn't likely to be a factor going forward? Because everything else you can control, that's something, to some extent you can control and to some extent you might not be.

So tell us what's going on with managed care please..

All right, Sheryl. Thank you.

Good question and Sam you want to lead on this one?.

Yes. Let me say this from the historic. I don’t think in any of our markets there is any structural changes that have occurred with our relationships with commercial payers that would suggest we are in any significant way begin steered away from or out of contract or any of that. That is not the case.

The company is locked in on the number and the available contract today just as we were last year and as we look forward to 2016 and 2017, we are roughly 75% contracted on '16 and 50% contracted on '17 at very consistent terms with recent past year. So for the quarter we were up what, 1.8% on adjusted admissions.

That is slightly down from where we were in the first part of the year. I think the first part of the year Sheryl, benefitted from the first quarter in particular where our exchange comp against last year was quite a bit positive. And so our trend of about 2% in this quarter is not that far off where we expect it to be.

We actually grew our revenue at almost 6% in the third quarter compared to 7.7% year-to-date. So it is off a bit when I look at that, but there is nothing to suggest that the economy across HCA's 42 markets has dramatically changed or any other competitive dynamic has had an impact on our business.

There is a normal ebb and flow to our business and sometimes it's hard to discern exactly why it trends down a bit. But I was reasonably encouraged by the fact that we still saw volume growth in our commercial book of business in the third quarter of 2%. That was a positive indicator for me.

And it suggests that there is still growing demand in that particular segment of the business and it's very important as you know. So I can't put anything on it at this particular point in time.

Obviously, if we get the second quarter market share data and we start to see early reads on third quarter market share data, it will give me some better insights into whether or not we had a market share loss potentially in the third quarter which I don’t believe is the case. So right now there is not a lot to point to.

I will reemphasize that in my comments, I mean our managed care delivery volume was up 5.7%, that’s a very strong number. Our emergency room visits were up 3.5% and within some other outpatient areas we had solid growth on the commercial side as well. So that’s sort of my take at this particular point.

As I get more external data sources, I will be able to check my thinking on those particular assumption..

And Sam, too, I think we had a really tough comp to last year. We had a favorable comp in the first quarter but the third quarter of last year I think was a, created a more difficult comp with respect to the growth rate over prior year..

And we will go next to A.J. Rice of UBS..

I want to come back to some of Bill's comments about the uninsured pickup you saw. I think there was a reference to, there was a slowdown in Medicaid process in Kansas and Texas.

Is that something where you have got a bolus of patients that therefore you are going to maybe get incremental reimbursement in the fourth quarter? And I am going to broaden it out a little bit on the uninsured.

I've been asked about repeatedly, about your ER investments and whether that's potentially some of the early volume you see there in the freestanding or associated with your facilities.

Is that in any way driving incremental uninsured? And then also any comment on the Texas oil price drop and whether that might be having an impact?.

Well, Bill's going to answer it, but I want to add one more comment to what I said a moment ago about commercial volume. I was just looking over the last 11 quarters. In the third quarter we had the most adjusted admissions for our commercial book of business then we have ever had over that same time period.

So, yes, it was a challenge then when we were up but the number we had in the third quarter was the highest number we had ever had.

So, sorry, Bill?.

Yes. A.J., let me try to address the other questions that you have. One, specifically on what we cited as what we think is a slowdown in processing some Medicaid application in Texas and Kansas. We are hopeful those are temporary and as the state kind of goes through processing those then we will begin to see those covered on Medicaid.

But that’s really reflecting itself in a low conversion rate in both Texas and Kansas. And again, we attribute maybe a quarter of our 4000 or so uninsured growth relative to that issue. So we are hopeful that does correct itself going forward.

On kind of broader uninsured trends in the ED, we are seeing a growth in ED volume and that has a corresponding growth of uninsured ED but you had as Sam mentioned a lot of other kind of commercial and uninsured ED growth to kind of offset that..

And I think the payer mix, Bill, in the emergency room was about the same as this..

Pretty [possible] [ph]. When you look at uninsured as a percent, it still gets to around that 20% level. So it hasn’t materially changed on us. And then Texas oil. Texas oil, I have not seen anything. When we look at Houston uninsureds, it's no more pronounced than any other markets that we have across the company..

Clearly the oil economy have had some impact on Houston in particular and then some sprinkled impact across other Texas markets. However, the Texas economy is so strong that there still reported job growth even in Houston and obviously in the other markets and we are seeing that in the demand that we are studying within the Texas markets..

And then one last one, A.J., I think you asked, the freestanding ED strategy we have really does not impact in any of our uninsured trends..

And we will go next to John Ransom of Raymond James..

Can you just talk a little bit about your expectations for 4Q and what you see relative to business mix and staffing that may be different than 3Q? Thanks..

All right, I don’t know how much we can really address 4Q..

Well, I think our guidance states it pretty clearly as far as the expectation goes. As far as the....

In other words, your guidance didn't really change that much from 4Q, so obviously you are seeing some of these issues as temporary. So just a little more color would be great. Thanks..

Well, I think at a high level, John, we clearly as you just heard, I think Sam described we are expecting to see improvement in the productivity. Again we have already, we have implemented actions. We will continue to implement other actions during the quarter that we hope will show results here in the fourth quarter.

So I mentioned in my earlier comments, some around the implementations of actions around contract labor. Maybe more the intermediate term, certainly hope to have some impact in the fourth quarter. But that’s solving a turnover issue is a little bit longer term issue.

You know basically we see continued top line growth that gives us lot of encouragement about the fourth quarter. And then we think -- we have taken actions around some of the initiatives that Sam mentioned. So I think the outlook for the fourth quarter is reasonable and I am comfortable with our guidance..

And just on that point -- sorry, go ahead. I'm sorry.

So on that point, is there any reason to think 4Q, 2015 will be any more seasonal than 4Q '14? Are you seeing elective procedures getting pushed further and further back?.

No, I don’t think so. As we know Q4 is generally one of our strongest quarters that I don’t see '15 being any seasonally different then maybe what we have experienced in the recent past..

And we will go next to Frank Morgan of RBC Capital Markets..

I will change gears, here. Maybe on the DC front, obviously a lot of talk about how to deal with this, addressing the Part B premium increases for Medicare beneficiaries, talk of cuts for provider or for the program. Could you talk and provide us your view on how you see that playing out and how you see hospitals exposed on that issue? Thanks..

Sorry, Frank. I will go ahead and do this. I guess number one, I think everybody has probably seen or heard there was a bill proposed, put together last night. It's our understanding that the house will likely vote on it this week and send it next week. I really haven't read all the 144 pages, I haven't read hardly any of it.

But I have seen few synopsis here and there. I guess on the front side, number one, it is still proposed so we will see where it comes out at the end. First, we don’t like any reductions in Medicare payments ever. But having said that, we also know that on more than one occasion we have to help for the better good of whatever.

The one reduction which is in there which we have seen before is the extension of the sequester now going out to 2025. And then I think the only other Medicare reimbursement related reduction or going forward relates to some outpatient, off campus changes. And I guess what I can say there, number one, they are prospective as to future transactions.

So that’s what's a good thing. It's not anything retroactive and it's not a straight cut. So we will study that closely. But I never want to say it cuts good but I have seen worse cuts..

But this is essentially backend loaded so it wouldn’t affect 2016..

I think that’s fair..

And we will go next to Whit Mayo of Robert Baird..

Can you just remind me where we are today on Texas UPL and the indigent care program? I know it was $142 million headwind versus last year. I feel like there was another $70 million number that I had in my notes.

And then maybe just remind us where you are on the $100 million of investments that you talked about earlier this year?.

All right. You are sneaking in two questions. But we will let you have that. So somebody is going to address Texas UPL and then we will talk about the investments.

Bill, you want the UPL piece?.

Yes. Well, on Texas waiver program, we really haven't seen any material changes in that program. In the quarter we recorded about $87 million of waiver revenue which is really consistent and almost exact same that we recorded in Q2. So that’s remained consistent for us.

The $142 million you mentioned was an adjustment we recorded in the second quarter of last year and we have kind of adjusted for that. We did anticipate earlier in the year a potential reduction in the waiver revenue but we set, I believe in last quarter we no longer anticipated that.

So our waiver revenue accrual we are recording this, is really consistent throughout 2015..

Yes. On the corporate initiative and so forth -- this is Sam -- the third quarter was a high watermark for the implementation of a couple of our initiatives. On the HR side as I said, we are deeper, almost halfway through our rollout.

Maybe even two-thirds the way through our rollout on our One HR and we did have a significant cost variance compared to the third quarter last year and our overall HR cost center.

And then on the clinical IT side, again, the third quarter was a fairly large quarter with respect to a number of company initiatives to improve our clinical IT capabilities and put ourselves in a better position with our physicians and enhance our nurses ability to deliver care and then just to improve our clinical data warehouse.

So those are all components of the third quarter. It presented some comparison and challenges. We are pretty much at a high watermark on our HR spend and that will level out. IT continues to be an opportunity for the company and we will have some incremental growth there and we are going through our planning process for 2016.

As we speak to make sure our priorities are lined up with where they need to be for the next few years..

And we will go next to Andrew Schenker of Morgan Stanley..

So just on rehab and behavioral growth, both had extremely strong growth in the quarter here. Maybe if you could just discuss your investments in these areas and maybe the room for continued growth for both of them. Thank you..

Sam, line is yours..

Both of these components of our business continue to perform very well for us. And keep in mind they only represent about 7.5% of our total admissions. Behavioral representing about 6% and rehab representing about 1.5%. We have ongoing development of new units in expansion of existing units in motion as we speak.

In some instances that’s to actually add service line capability in certain markets and then in others it's to add capacity in order to deal with our occupancy levels and the constraints that we have got for growth with respect to that. They both are very central to service lines for HCA.

The behavioral health service line is very central to being able to manage our emergency room service line very effectively. And then rehab is very central to our neurosciences and trauma program. So they are very complementary on that front.

And we will continue to leverage components of those strategy in a collaborative way, if you will, to advance our position. The capital investment on these is small in the overall scheme of HCA's $2.7 billion of spend that we intend to pay for next year.

So it's not a very significant component of that total spend but it is significant with respect to those particular service lines..

And we will go next to Brian Tanquilut of Jefferies..

Just a question on exchanges. So as we think about going into the open enrollment season, are there any initiatives that you guys can put in place or are already putting in place to drive exchange enrollment? We saw the rates come out yesterday.

Is there anything related to that that you can do to put the message across to currently uninsured folks? Thank you.

Yes. Thank you, Brian. This is Bill. Last year we stepped up our efforts in our communities. We partnered with several agencies including Enroll America and others, to try to reach out inside our communities where we believe still uninsured people have the opportunity to participate. We are going to continue to do that in our enrollment period.

We have a team and a committee of people that are working with our local markets and some third party agencies where we will be sponsoring community agencies, participating with other community events and trying to reach out to the uninsured volume in our communities that we think still are able for subsidies.

We are trying to target that very thoughtfully in some of our key and larger markets where we have data that suggests there is still opportunity there. So I would characterize that we are active in that space and we are working diligently to try to reach out to that community..

And Brian, I would add, I think most of you saw HHS, they have put projections which are pretty conservative I think, going into next year. But the good news is, they also cited that they were going to put increased efforts in five different markets. The good news is three of those five happen to be important market to us.

One is Houston, one is Dallas and one is Miami. We don’t care much about their New Jersey effort or wherever their other one was, but those are three good ones for us. So thank you..

And we will go next to Ralph Giacobbe of Citi..

Is the higher bad debt simply a reflection of the uninsured or is there anything else going on in terms of how you are treating discounts versus charity or collections on the insured piece? And then just real quick, as somewhat of a follow-up. The pricing stat on the inpatient side is sort of flattish.

Could you just help reconcile that versus the revenue per adjusted admission. Thanks..

All right.

So, Bill, do you want to...?.

Let me try kind of your bad debts and Ralph thanks for the question. As you know we have historically looked at the total uncompensated care which includes bad debts and uninsured and charity. And from period to period you can't get some movement from one or the other.

With our slowdown and pending Medicaid conversions we saw this quarter, that does put a little bit more in the allowance through doubtful accounts which flows through for bad debts. But our total uncompensated care generally is moving in concert with what our uninsured trends are.

We have seen recent growth or continued growth of co-pays and deductibles. That’s not recent. Our collection rates are staying really consistent with where they have been in the prior years. So we are not really seeing any erosion in collection. So even though the co-pays and deductibles have grown, our collection rates amounts have remained stable.

And so the largest factor on our uncompensated care continues to remain the uninsured growth. On the inpatients data, we need to get back with you on that -- we need to flow through on that..

Yes. We will follow up on that one, Ralph. I am not sure anybody has that answer..

And we will go next to Gary Taylor of JPMorgan..

One question, three parts if you will indulge me.

First, did I miss the charity and discount disclosure? I was listening but maybe I didn't write it down?.

You missed it. I will be happy to give it to you again, Gary. Let me pull it up. So our same facility charity care and uninsured discounts increased $525 million. Charity care totaled 914 which was a decline of 117 from the prior year. Uninsured discounts totaled 2.755 which was an increase of 642..

Right. You simply didn’t listen. I am not sure we will let you do the other two pieces..

Oh, I get dinged. It's all related. Real quickly. I know at one point, you were writing -- or early in '14 you were writing off 100% of the inpatient self-pay via charity and discount and none of that was really flowing through to the net revenue before bad debt.

Is that still true? Or it sounds like maybe, from your answer to the last question, maybe some of that is changing with the Medicaid pending?.

Yes. Let me just try to clarify. So we have a charity care policy that if you meet our charity guidelines, we do write off 100% of your bill. If you don’t meet our charity guidelines and you are uninsured, we apply an uninsured discount which is basically reflective of what you would be billed if you are insured.

So it's not 100% but it's a substantial portion of your bill is written off on uninsured discount and then the residual then goes through kind of the bad debt line item. But you also have movements going on with Medicaid and pending Medicaid that affects those items as well..

Okay. That's very typical treatment. So I must have misunderstood.

My last question is, can you just give us an update on co-pay and deductible as a percentage of revenue? And could you be clear as to whether that's before or after contractual discounts or any other discounts or bad debt? Kind of how do you size what co-pay deductibles look like?.

Yes. As I mentioned earlier, we have seen over the past recent years a growth in the patient liability related to co-pays and deductibles. And we still see that. I call that a net 10% to 12% on a per account basis. But our collections have remained relatively stable.

We have said and we validated this recently about a 30% of our write-offs were attributable to kind of deductible and cos and the balance to uninsured. That really has not changed and the data that we have seen.

So I would tell you that the deductible and co-pay environments have been relatively stable for us, relative on a material way to our trends..

And some of that we are still collecting upfront..

And we still collected at least a third of that upfront..

And we will go next to Brian Wright of Sterne Agee..

Was there any impact at all of fewer weekdays post-Labor Day this quarter?.

Anybody want that?.

Not that we [indiscernible]..

I think we got three no's..

Fair enough. And then just one clarification. The ACA EBITDA impact on the quarter, was that 6% or 6.5%? I just didn't get it all down..

You know as we roll out the pieces that we do track, it's just under 6%..

Just under 6%. Okay. Thank you..

And I think we got time for one last question..

And we will take our final question from Paula Torch of Avondale Partners..

Thank you for fitting me in.

So you gave us some great color on labor and cost but I was wondering if we could talk a little bit more about potential for wage rate increases as we move into next year? Should we expect to see more of an inflationary environment on that front? And if so, could you talk more about your ability to manage through it? Thank you..

Well, we have routine studies. This is Sam. We have routine studies that we do within each of our markets twice a year in order to understand our competitive positioning with respect to wages. And as we sort through those analysis and those different issues, we try to make timely adjustments.

So as a routine we are making market specific adjustments to remain as competitive as we possibly can. So those are specific market issues. Across all HCA markets I think it's reasonable to assume that there will be some increase in wages in our trends over the next few years.

I don’t think it is anything that is overly material or something that we cannot manage through effectively.

We obviously try to short cycle our commercial contracts in a way to line up with any acceleration in wages so that we can adjust our commercial pricing to sync up with overall pressures on inflation, mainly in the wage and then secondarily on the supply side. So I think from that standpoint we are in a pretty good spot as well.

But right now we are of the mindset that our trends are generally reflective of current market conditions with maybe some modest acceleration in a few pockets here and there. But we think it's manageable in the short run..

All right. Paula, thank you very much. And I want to thank everyone and hopefully I didn’t offend anybody from New Jersey with my comments earlier. It was not intended. Anyway, you all have a great day..

And this does conclude today's conference. We thank you for your participation. You may now disconnect..