Victor L. Campbell - Senior Vice President R. Milton Johnson - Chairman & Chief Executive Officer William B. Rutherford - Chief Financial Officer & Executive Vice President Samuel N. Hazen - Chief Operating Officer.

Sheryl R. Skolnick - Mizuho Securities USA, Inc. A. J. Rice - UBS Securities LLC Joshua Raskin - Barclays Capital, Inc. Frank Morgan - RBC Capital Markets LLC Whit Mayo - Robert W. Baird & Co., Inc. (Broker) Kevin Mark Fischbeck - Bank of America Merrill Lynch, Inc. Andy Schenker - Morgan Stanley & Co.

LLC Scott Fidel - Credit Suisse Securities (USA) LLC (Broker) Brian Gil Tanquilut - Jefferies LLC Matthew Borsch - Goldman Sachs & Co. Chris Rigg - Susquehanna Financial Group LLLP.

Welcome to the HCA first quarter 2016 earnings conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to Senior Vice President, Mr. Vic Campbell. Please go ahead sir..

Thank you Stephanie, and good morning to everyone. Mark Kimbrough, our Chief Investor Relations Officer, and I'd like to welcome everyone on today's call, including those of you that are listening on the webcast.

Here this morning with me 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 are based on management's current expectations.

Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. Many of these factors are listed in today's press release, and in our various SEC filings.

Several other 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.

excluding losses or gains on sales of facilities, losses on retirement of debt, and legal claims costs, which are non-GAAP financial measures. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HCA Holdings, Inc.

to adjusted EBITDA is included in the company's first quarter earnings release that came out this morning. This call is being recorded. A replay is available later today. With that I'll turn the call over to Milton..

Thank you, Vic, and good morning to everyone joining the call and the webcast. This morning we issued our first quarter 2016 earnings release, highlighting the financial operational performance of the company. I'll make a few comments on the quarter, and then I'll turn the call over to Bill and Sam to provide more details on the quarter's results.

We are pleased with the results in the first quarter which are in line with our internal expectations. Adjusted EBITDA of $2.003 billion for the first quarter, increased 2.1% over prior year.

As expected, the first quarter of this year was a difficult comparison to the first quarter of 2015 when adjusted EBITDA grew 19.3% over the first quarter of 2014. Net income attributable to HCA Holdings, Inc., increased 17.3%, and earnings per share increased 24.3% for the quarter.

As noted in our release this morning, net income, EPS and cash flows from operations were favorably impacted by an accounting change we adopted related to share-based compensation, which lowered our tax rate for the quarter.

Our 2016 guidance remains unchanged, except for adjusted EPS which has been increased by $0.20 per diluted share on both the low and the high end of the range. This is to reflect the tax benefit recorded during the first quarter of 2016 related to the accounting change made in this first quarter.

We have not attempted to estimate the impact of this accounting change on future quarters of 2016, as the tax benefit depends upon the number of equity awards settled each period, and the market value of our stock at the time of settlement.

We continue to experience solid growth in inpatient and outpatient volumes as well as surgical and emergency room visits. We believe these results speak the quality of our markets, and the execution of our strategic agenda. Same facility admissions increased 1.6% while same facility equivalent admissions increased 3.1%.

Our growth drivers include capital improvements, programmatic developments within our service lines, end market access point development and strategic acquisitions. This year we plan to invest $2.7 billion to expand our service capabilities and capacity in our markets.

In 2016, approximately 350 new inpatient beds and 100 new ER beds will come online, with another 550 inpatient beds and 200 ER beds scheduled for completion in 2017. We continue to see solid growth from our investments into service line development such as trauma, cardiology, rehab and (4:58) services.

Our strategy to expand our access points in our markets is providing growth opportunities to inpatient and outpatient services. The effective execution of our growth agenda is yielding market share gains, and Sam will provide additional details in a moment.

With respect to supply expense we continue to see solid execution of our initiatives to manage our supply costs. We are pleased with the early results of our integration of Tenet Healthcare into HealthTrust Purchasing Group.

And clearly, one of the highlights of the quarter is the strong growth in cash flows from operations, up 37.4% over last year's first quarter. The quarter reflects our balanced approach to capital allocation.

During the quarter we generated almost $1.4 billion in cash flows from operations, and we deployed $509 million to capital expenditures, and $621 million to repurchase 8.921 million shares of our stock. And we had $1.983 billion remaining on our $3 billion share repurchase authorization at the end of the quarter.

Finally, let me recognize Don Stinnett, HCA's, Senior Vice President and Controller who retired at the end of April. We thank Don for his 17 years of service, and the many contributions he's made to our company. I'd also like to welcome Chris Wyatt who has succeeded Don as Senior Vice President and Controller.

Chris most recently served as Vice President and Chief Financial Officer of HCA Information Technology and Services organization. With that, I'll turn the call over to Bill..

Thanks. Good morning, everyone. As Milton indicated, we had a solid quarter that was driven by good volume growth and our adjusted EBITDA results were in line with our expectations. Let me give you some more detail on our performance and the results for the quarter.

As we reported, in the first quarter, our same facility admissions increased 1.6% over the prior year, and same facility equivalent admissions increased 3.1%.

Sam will provide more color on the drivers of this volume in a moment, but I'll give you some trends by (7:08) During the first quarter, same facility Medicare admissions and equivalent admissions increased 0.8% and 2.1%, respectively. This includes both traditional and managed Medicare.

Managed Medicare admissions increased 3.1% on a same facility basis, and now represent 33% of our total Medicare admissions. Same facility Medicaid admissions and equivalent admissions increased 1.4% and 4.3%, respectively, in the quarter, in line with our recent trends.

Same facility self-pay and charity admissions increased 10.6% in the quarter, while equivalent admissions increased 9.4%. These represent 6.9% of our total admissions compared to 6.3% last year. There are a couple of points on our uninsured volume I'd like to call out.

First, our uninsured same facility admissions in our expansion states were flat year-over-year, while our non-expansion states grew just over 11%. Texas and Florida represent about 70% of our total uninsured admissions, and represent 90% of the year-over-year growth.

And to put this uninsured growth into perspective, the 10.6% growth we saw in the quarter equates to just over 3,000 admissions for the company, compared to the 477,000 same facility admissions we have for the quarter.

Managed care and other, which includes exchange admissions, increased 1.5%, and equivalent admissions increased 2.7% on a same facility basis in the first quarter compared to the prior year. Same facility emergency room visits increased 6.9% in the quarter compared to the prior year.

Same facility self-pay and charity ER visits represent 18.6% of our total ER visits in the first quarter for both 2016 and 2015. Intensity of service or acuity increased in the quarter, with our same facility case mix increasing 2.7% compared to the prior-year period.

Same facility surgeries increased 3.3% in the quarter, with inpatient surgeries increasing 1.4%, and outpatient surgeries increasing 4.4% from the prior year. Same facility revenue per equivalent admission increased 2.2% in the quarter. Our outpatient revenues in the first quarter continued to show very strong growth.

Outpatient revenues in the quarter represented 38.9% of total revenues, up 120 basis points from prior year's first quarter. Same facility managed care and other revenue per equivalent admission increased 5.9% in the quarter. Same facility charity care and uninsured discounts increased $618 million in the quarter compared to the prior year.

Same facility charity care discounts totaled $951 million in the quarter, an increase of $63 million from the prior-year period, while same facility uninsured discounts totaled $3.076 billion, an increase of $555 million over the prior-year period. Now turning to expenses.

Same facility operating expense per equivalent admission increased 2.8% compared to last year's first quarter. On a consolidated basis, salaries and benefits as a percentage of revenue was 45.8%, compared to 45.5% in last year's first quarter, and 45.7% for the full year of 2015.

Salaries per equivalent admission increased 2.8% in the quarter on a same facility basis. Productivity, as measured by same facility man-hours per adjusted admission, improved 0.5%, and same facility wage rates increased 2.5% in the quarter.

Supply expense as a percent of revenues, were 16.7% this quarter as compared to 16.9% in last year's first quarter, on a consolidated basis. Same facility supply expense per equivalent admission increased from 1.4% for the first quarter compared to the prior-year period, reflecting continued success on several supply chain initiatives.

Other operating expenses increased 40 basis points from last year's first quarter to 18.1% of revenues, and was consistent with the 18% we ran in Q4 of 2015, and 18.2% in Q3 of 2015. We recognized $4 million of electronic health record income in the quarter compared to $19 million last year, consistent with our expectations.

Let me briefly touch on cash flow. As Milton mentioned, we had another extremely strong quarter, with cash flow from operations just under $1.4 billion, about a $380 million improvement. Cash flow from operations was benefited by $74 million due to the adoption of new accounting standard that I will discuss in a minute.

Free cash flow increased $339 million, from $440 million in Q1 of 2015 to $779 million in Q1 of 2016. At the end of the quarter, we had $2.9 billion available under our revolving credit facilities, and debt to adjusted EBITDA was 3.84 times at March 31, 2016 compared to 3.85 times at the end of 2015. Let me touch briefly on health reform.

Health reform activity continued to grow in the quarter. In the first quarter, we saw approximately 12,500 same facility exchange admissions as compared to the 9,860 we saw in the first quarter of last year, or about a 27% increase.

You may recall, we saw about 11,200 same facility exchange admissions in the fourth quarter of 2015, or 11% increase sequentially quarter-to-quarter. We believe this is largely due to the minimum enrollment (13:27) For perspective, exchange admissions represent about 2.6% of total admissions for the company.

We saw approximately 50,000 same facility exchange ER visits in the first quarter compared to the approximate 37,000 visits in the first quarter of 2015 and 38,000 visits in the fourth quarter of 2015. Overall, our exchange and reform activity is in line with our expectations.

Lastly, as mentioned in the release, the company did elect to early adopt a new accounting standard FASB ASU 2016-09, which was issued in late March. This standard simplifies certain aspects of accounting for share-based payment transactions.

In summary, the standard requires the excess tax benefits related to equity award settlements will be recorded as a component to the provision for income taxes prospectively, versus previously these amounts were recorded directly at equity. In the quarter, we recorded $74 million tax benefit, or $0.18 per diluted share related to this adoption.

Also, these tax benefit amounts were previously presented as cash flow from financing activities, but are now reflected as cash flows from operating activities. So that concludes my remarks, and I'll turn the call over to Sam for some additional comments..

Good morning. As mentioned earlier, the first quarter was another solid quarter of volume growth for the company. The company continued to show broad-based growth across our markets, and broad-based growth across the various service lines that make up our business.

There were a number of factors that impacted our inpatient admissions and outpatient volumes this quarter. First, flu admissions were down by 40%, which affected our overall inpatient admission growth rate by 0.6%. And then secondly, leap year positively affected our inpatient admissions by approximately 1%.

But this calendar effect was partially offset by the Easter holidays which were in March this year. We believe the net impact of all these factors had an immaterial effect on overall volumes.

For our domestic operations, on a same facility basis, 11 of 14 divisions had growth in admissions, 14 of 14 divisions had growth in adjusted admissions, and 13 of 14 divisions had growth in emergency room visits. The company had a total of 56 freestanding emergency rooms at the end of March. We had 44 last year at this time.

Freestanding emergency room visits grew 31% and accounted for approximately one-third of our overall growth in visits. Hospital-based emergency room visits grew 5%. This broad-based performance reflects HCA's strong and diversified portfolio of provider networks in 42 domestic markets, most of which, we believe, still have good growth prospects.

In addition to the strong portfolio performance, the company's growth across its diversified facility base and service line was equally strong. For domestic operations on a same facility basis, inpatient surgeries grew by 1.8%, which increased surgical admits to 27.6% of total admits in the quarter, an increase of 100 basis points.

Surgical volumes were particularly strong in cardiovascular, orthopedic and general surgery categories. Outpatient surgeries grew by 4.6%. Both components of this service line, hospital-based and our freestanding ambulatory division had equally strong growth. Also same facility outpatient endoscopic and pain procedures grew by 1.6%.

The company continues, strategically, to add freestanding ambulatory, endoscopic and pain centers to its provider networks. As compared to the first quarter of last year, we have acquired or developed nine new centers, and closed or sold four for a net of five more, bringing our total to 131 centers.

Including these new centers, the company's total outpatient surgery volumes grew 6.3% and outpatient endoscopic and pain procedures were up 6.7%. Behavioral health admissions grew 2.7%, rehab admissions grew 2.8%. Deliveries were flat in the quarter, however, managed deliveries were up 4.4%.

Neonatal admissions grew 4.7%, but our length of stay declined because of less acuity this quarter, which impacted our patient day growth in this service line. Overall, average length of stay increased 0.5%, which was driven mainly by the growth in our acuity or case mix index.

We believe our efforts in developing a more comprehensive and complex level of services across our provider networks are driving this increase. Other volume statistics for the quarter are as follows.

Cardiology procedure volumes grew approximately 5%, trauma volumes grew 27%, observation visits were up 13%, and finally the company's urgent care visits in total grew 22%. The company had 68 urgent care centers at the end of March this year, up from 50 last year.

The inpatient market share data for the 12 months ended September 2015 shows that HCA continued to gain share, and our composite share of 24.6% was at its highest level in the past five years.

We believe our comprehensive growth agenda, which is both well-resourced and well executed, provides further opportunities for the company to increase market share and drive revenue growth. With that, let me turn the call back to Vic..

All right. Thanks, Sam. Stephanie, if you will come back on and poll for questions, and we would encourage folks to ask only one question, so we can get everybody covered..

Thank you. We will go first to Sheryl Skolnick with Mizuho Securities..

(20:07) So in this quarter, and in previous quarters that you've experienced increases in uninsured volumes, some folks have been focusing on bad debt, and so while I hate to ask the question, I have to ask the question because I know it's on the minds of many.

So the fundamental question is, how worried should we be about the increment that we see in your bad debt ratio in this quarter? That's number one.

Number two, can you give us an estimate of the impact of the treatment of these patients on the EBITDA performance? And whether that might be a reflection of the difference between this year's in line performance versus last year's strong outperformance? And third, can you give us a sense of whether or not that increase that you experienced was anticipated by you, or whether you're gaining market share and adding ERs may have led to a slightly higher than anticipated increase in uninsured services?.

All right. Sheryl, thank you.

Bill do you want to take that?.

Yeah, Sheryl, good morning. Let me try to address most of your points. When I look at the bad debts, and as you know, for HCA, I think we have to look at the total uncompensated care picture, which includes charity as well as the uninsured discounts.

When I look at our total uncompensated care trends, those trends are pretty consistent with our recent experience. When I look at it as a percent of adjusted revenue, it was 32% for the quarter, 32.6% in the fourth quarter, 33% a little high in the third quarter, 30.7% in the first and 29.6% in the first.

(22:00) So our trends are pretty consistent, and I would tell you we're pretty much in line with what we had internally projected. As we've said, I believe the uninsured volume will be driven by our emergency room volume.

Our emergency room uninsured ED visits were up 26,000 compared to our 3,000 or so uninsured growth, you see that's a 12% in net rate, which is pretty consistent with what we've historically seen. And then as I mentioned in my comments, it's driven by Florida and Texas. Obviously two non-expansion states that we continue to see.

So I had anticipated our uninsured trends to kind of settle out around that high single digit level. I think it will be really settling where our ED visits land. The EBITDA impact is really marginal.

As we talked, the EBITDA impact is the marginal cost that we have for that, so I don't think that really contributed materially to the EBITDA issues for the quarter for the company..

Sam, did you have anything? All right. Sheryl, thank you..

Okay. Thank you..

We go now to A.J. Rice with UBS..

Hi, everybody. I might just ask one technical question and then a broader question. Just on the technical one, you were very active in the buybacks in the quarter.

What should we think of in terms of ongoing buybacks? And is there any update on what you did so far? But my broader question is with the consolidation for the managed care guys pending, and with a lot of discussion about various incentive payments on part of managed care guys with providers, either positive incentives or putting price at risk.

Are you seeing any change in contracting behavior as you look out over the next year or two? And what percentage of your contracts are sort of locked up? And any color on what you're seeing there?.

All right.

Milton, do you want to take number one? And maybe Sam on two?.

Sure. Well, as I mentioned in my comments, at the end of the quarter, we had just under $2 billion remaining on our share repurchase, $1.983 billion. But I'm going to give you an update, through yesterday, at close of market activity, our remaining authorization is $1.708 billion, so just over $1.7 billion remaining.

So we have been active since the end of the quarter. Obviously, we'll go into an open period here shortly – by tomorrow, and so we're evaluating our purchasing patterns as we go through the next several weeks. But we have remained active in the market since the end of the first quarter, A.J..

Great..

Sam or, Bill.

Sam?.

On the managed care front, I think the general comment is this. The pricing environment is generally consistent across most of our markets with what we've seen over the past 24 months to 36 months.

There are some nuances from one market to the other, with one contractor or the other, where we have to adjust the structural pieces of the contract, but again, those are more on the fringe than in the core aspects of the contract. For the company, we're largely contracted for all of 2016, as we indicated in our guidance.

We're about 70% contracted in 2017, and about 45% contracted for 2018. And in general, the pricing escalation and the structural aspects of those contracts are pretty much consistent with what we've seen in the past 24 months or 36 months.

We don't believe that the consolidation across our 42 markets of the payers is going to have a global impact on HCA. We think, if those particular mergers are consummated, that in some market, they could have some nuanced impact, but again, we don't see that as a material change in what's going on in the marketplace..

Excellent. Thank you..

We'll go now to Josh Raskin with Barclays..

Hi. Thanks. Wanted to concentrate on the divergence in growth rates on your surgeries, inpatient versus outpatient.

I'm trying to figure out how much of that is patient preference or physician movement, relative to how much of that is HCA initiatives around growth in your surgery centers, and your specific initiatives to do that? I guess, trying to figure out how much of that is intentional, versus how much of that is just market driven?.

All right, Sam, you want....

inpatient, ambulatory surgery and then hospital-based outpatient..

Josh, thank you..

We'll go now to Frank Morgan with RBC Capital Markets..

Good morning. You talked about labor productivity, but I didn't hear any mention of contract labor. Could you tell us kind of how contract labor trends ran relative to a year ago in recent quarters? And then also could you provide a comment on the recent Florida legislation on balance billing and out-of-network? Thanks..

Sam, you are up again..

For labor, we were pleased with the results for labor in the first quarter, and we were pleased in particular when you look at it sequentially against the fourth quarter of 2015 where we had 3.5% productivity improvement from the fourth quarter to the first quarter, which represents about a 75% flex rate, if you want to call it that, on the incremental volume that we saw from the fourth quarter to the first quarter.

Now, in the first quarter we have to pay more payroll taxes, more unemployment insureds and so forth, so our total spend was up about $122 million because of benefit costs, natural growth that occurs first quarter compared to the fourth quarter. Compared to last year we did have a slight margin erosion. Two factors drove that.

Share-based comp being a piece of that, and then a moderated growth in contract labor being the other piece. Contract labor for the company has run the same amount of dollars over the last three quarters now.

So the first quarter did not see any growth in total spend compared to the fourth quarter, which was consistent with the third quarter, so we've seen some stabilization. We believe that our efforts around this particular area presents an opportunity for HCA in the future.

If we can stem some of the nursing turnover that we have experienced and improve our retention efforts, and we have a number of initiatives to deal with that, we think we can drive some incremental improvements over time in this particular area.

So all in all, the productivity and the results from a labor standpoint for HCA in the quarter were well managed, we believe, when you look at it compared to where we were in the fourth quarter. With respect to the balance billing issue in Florida, we're not thinking that's going to create a lot of issues for us one way or the other.

We believe for our patients it's going to be beneficial and that it will eliminate in many instances potential surprise billings around certain hospital-based physician providers.

But for us and our approach to the market and our relationships with our physician contract companies, we're not anticipating any kind of impact from the balance billing legislation in Florida..

Frank, thank you..

Thank you..

We'll go now to Whit Mayo with Robert W. Baird..

Hey. Thanks. Good morning. I feel like you guys have a lot underway behind-the-scenes with HPG and I sense that there's some momentum in some areas like pharmacy and distribution centers, and how you're aligning the pharmacists with the supply chain decisions. Just any comments around these initiatives would be helpful..

All right..

I'll take that one (32:22) And you're right, we have a lot of momentum inside the HealthTrust Purchasing Group, not only with activities with our members, as Milton said with the Tenet integrations and some others that they are very integrated with us from an operational standpoint and have been for over 10 years from managing our distribution centers, accounts payable, and we have some recent initiatives there that we still become very encouraged with.

One of them is what we refer to as a pharmacy consolidation initiative that we have going on throughout the markets in HCA where we consolidate the pharmacy supply chain as well as the pharmacy distribution chain, and embed pharmacists in there to work with our clinicians on the floor to ensure that the prescriptions in our pharmacy utilization is optimized on there.

In addition, it helps us with the procurement of pharmacy and looking at the storage and inventory on there. So it's just one more initiative that we have going on. They're embedded in our operating rooms to help us manage our inventories, supply chain within the operating rooms as well as many other distribution efforts.

So the overall HPG from one aggregated spend on the GPO as well as operational initiatives, I think continue to deliver a lot of value to HCA and its members..

Milt, do you want to add something?.

I'll just add with respect to HPG. I mean, it continues to grow. We're very pleased with the growth in terms of purchasing power. Being a GPO (33:54) a major piece of the leverage is purchasing power.

I think for 2016 HPG will probably hit somewhere in the $27 billion to $28 billion range in terms of purchasing power across all of the membership, and again, that's a committed compliance model, and I think that will allow us to continue not only focus on improving operational results with better supply chain management, but also continue to achieve a better pricing from vendors as a result of being able to do (34:20) market share to them..

All right. Thanks (34:24).

We'll go now to Kevin Fischbeck with Bank of America Merrill Lynch..

Great. Thanks. Question on the psych and the rehab volumes. The numbers were, I guess, pretty solid numbers but really sharply down over where they'd been the last few years. Just wanted to see if there was anything going on there as far as how you were spending your capital.

And I guess thoughts about the IMD exclusion, whether that makes you think differently about how you pursue psych volumes, whether you'd want to outsource that or actually build freestanding sites to take advantage of that..

Sam?.

In total, behavioral health admissions were off the trend at 2.7%. They've been trending in the upper single digits. I think for the most part, we had three facilities out of our 58 facilities that were down significantly. And when you looked at the other 55 facilities, they were actually on trend.

So we had a challenge or two at two facilities, three facilities rather, that created the composite problem for the company. There is no change in our strategy. We continue to invest in behavioral health capacity, and we have a lot of demand for that.

We've recently approved some expansion of behavioral health capabilities in a number of markets to deal with that. In some instances, we have struggled with psychiatrists in the supply physician coverage, and that's been more the barrier to growth than actual capacity.

But behavioral health continues to be a very important component and service line for our market strategy as well as a complement to our emergency room service line strategy. On the rehab side, again, we did see a little bit of volume growth that was off trend. Rehab was more in the upper single digits as well.

Again, no significant change across the company with respect to capital investment or focus on that particular service line. It was unusually soft in the first quarter. Again, a couple of hospitals explain some of that. We have seen in a few markets where we've some bundled pilots that it's had a marginal impact.

But all in all, that continues to be a very strong service line. We have investments going forward into that particular service line where we're adding capacity. And again, it complements very important service lines for HCA like neurosciences, trauma and burn and service lines like that. So we see opportunities for growth in that one as well..

Well, if anybody want to address the IMD exclusion.

Bill?.

Yeah. We don't think it's going to have any material impact on HCA. The majority of our behavioral health is still sourced from our emergency rooms. So again, I think as Sam said, I don't think that changes our strategy at all going forward..

All right. Thanks Kevin..

We'll go now to Andrew Schenker with Morgan Stanley..

Thanks. I just want to talk a little bit more about the other operating expense line. It was certainly higher than we expected. I appreciate that it was roughly consistent with second half 2015 numbers, but it certainly was up 40 basis points year-over-year. And historically, it's usually stepped down or been flat year-over-year.

It actually stepped up sequentially rather. What was behind that increase? And based on your comments around 2H, should be thinking of 18.1% really as the new run rate, or was there something particularly high in the quarter? Thank you..

All right.

Sam?.

Well, let me say that other operating expenses, generally, stay about the same from the fourth quarter to the first quarter. We did see a little bit of a trend change last year where it actually trended down a bit in the first quarter.

But in general, when I look back over three years, four years, it stayed about the same and that's what we saw this year. The fourth quarter and the first quarter were almost identical.

But when you look at it compared to the first quarter of last year, the execution of our service line initiatives, primarily trauma and then secondarily, graduate medical education, is driving professional fee expense growth for the company. We saw some deterioration in margin, primarily because of professional fee expense.

And there were three things that drove that. First, we did an acquisition of a physician network in Northern California last year, where most of the costs of that particular acquisition are in other expenses. And that drove a piece of the margin erosion.

The second piece and probably the more important piece and more connected to the company's strategy is around trauma program development, where we have to invest in professional fees to support our trauma programs.

And again, we've added significant amount of trauma programs, some are in their early stage startup modes, so you see a little bit of a disproportionate load of other operating expenses as a result.

And then the third piece was in our graduate medical education programs, where we've added graduate medical education programs for residents and so forth at a number of our facilities which required some level of professional fees for faculties and such so that we can support those programs.

All in all, we think there will be some growth in these numbers over the remaining portion of the year, but not in any way where it changes our trend and our expectation on the margin levels that Bill laid out.

If you look at some of our components, like our ER physician call per ER visit, or ER call pay-per-ER-visit, those are generally in line with what we expected, slightly up, again, because of these program changes.

So that's the biggest driver of our other expenses on a year-over-year, but it's very consistent, like Bill said, with the fourth quarter and even the third quarter, so the run rate is really not that materially changed..

All right. Andy, thanks. Thanks Sam..

We'll go now to Scott Fidel with Credit Suisse..

Thanks. I had a question just on the exchange volumes, and recognizing that it's still a small piece of the overall business.

Just interested if, in terms of the year-over-year, and even in terms of some of the sequential volume increases, whether you've observed any type of rising case mix or acuity on those types of admissions from the exchange patients?.

All right.

Bill?.

Yeah. Scott, thanks. Actually on our exchange business is staying really consistent, if you look at the mix, the case mix index, or the acuity of what we were running in 2015, and for that matter even in 2014.

So as you know, we look at a variety of characteristics of that change volume, source of admission, surgical medical mix, and it's staying relatively consistent in 2016, is the best way to describe that.

As I said in my comments, we are seeing growth – continued growth in reform, and I think that's largely attributable to the new enrollment that we saw this year starting in January, and so, with any hope, continue to see that growing going forward.

But in terms of the mix of the exchange volume and the characteristics, very comparable in 2016 compared to what it was in 2015..

All right. Thanks, Scott..

We'll go now to Brian Tanquilut with Jefferies..

Sam, you talked about the freestanding EDs as driving 30%-plus of the growth in the ER space, so do you mind just sharing with us what your growth plans are for that side of your business? And then, what do you see in terms of acuity levels in freestanding EDs, and are we seeing a change in how people use ERs in the markets where you're opening these facilities?.

All right.

Sam?.

Like I said, we have 56 freestanding emergency rooms today, that's up from 44 last year at this time. I think next year at this time, we will probably be somewhere between – depending on how quickly we get these up – 10 to 12 freestanding emergency rooms more as well.

So our pipeline on development of these freestanding emergency rooms is still fairly strong. We should be somewhere around 70 freestanding emergency rooms, I think, in the next 12 months to 18 months. The acuity level tends to be a bit lower than what you see in a hospital-based emergency room, for a couple of reasons.

One, obviously trauma cases aren't going to a freestanding emergency room, certain chest pain events are not going to a freestanding emergency room, nor are stroke events. So you have a natural tendency for the more acute patients, which are delivered by ambulance, to go to a hospital base because it's highly likely that they will be admitted.

I think the freestanding emergency room plays a very important part in our network development; it plays a very important part in our outreach to consumers, to make it easy for them to access the system. I don't know that the ER as a venue, if you will, is changing in any significant way.

I do believe, though, that urgent care and emergency rooms over the past three years to five years, and I think this will be the case going forward, is still a substitute for the shortages of primary care physicians that exist in a lot of markets.

And so you see urgent care, freestanding emergency rooms, and even hospital-based emergency rooms, providing the solution that patients are looking for when they can't get into a physician clinic because of physician shortages, or because of payer dynamics.

So from that standpoint, that probably structurally stays in place and we think it's part, in part – part of the reason for the overall demand growth that we've seen over the past few years in emergency room visit volume, and we think that will continue in the near-term..

Thanks, Sam..

All right. Brian, thank you. Stephanie, we've got time for probably two more questions..

Thank you. We'll go now to Matthew Borsch with Goldman Sachs..

Yes. Thank you. I'm sorry if this is already something you can calculate from the numbers you provided, but can you back out the – give us the managed care admissions and adjusted admissions excluding the exchange lives? And I'm not saying that that's the right way to look at it, I'm just wondering if you have that that you can share with us..

Bill, I don't know whether you have that or not?.

We can give that. I'll qualify that a large portion of our exchange business is coming from previously insured, so it's skewed, and that's why we include the exchanges in that number. It looks like on our managed and other, if you exclude exchange is up about 1% on adjusted admissions..

Okay, instead of 2.7%. Yeah, okay..

Yes..

Well, so let me ask you, based on what you've seen, is it your conjecture that there has been substantial growth in the exchange enrollment from the previously uninsured, or does it look more or like mix shift? And I know you can't give an exact answer, I'm just curious if you have an off-the-cuff?.

I think it's probably more mix. I would not say that we're seeing substantial changes in the exchanges coming from previously insured. As we reported last year, historically in the exchanges in the first couple of years about 40% of that exchange volume is newly insured and 60% was coming from previously insured.

My sense is those trends are staying relatively the same, so I really don't see there's dramatic shifts in that aspect of that that obviously would be in year three. The current year exchange volume was also probably an exchange patient last year, too. So that's changing a little bit.

But I would say that growth is just more continued market share and mix shift changes that we're seeing..

Got it. Thank you..

Thank you, Matt. One more question, Stephanie..

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

Hi. Good morning. Just on the operating cash flow, I think you previously said you expected around $5 billion.

Given the quarterly results, do you see that going higher? And then just on the CapEx, when we look at $2.7 billion, can you give us a sense for how much of that is going towards just real basic maintenance CapEx versus growth things like the freestanding ERs? Thanks a lot..

All right, guys?.

Look, I'll start. So right now, I think about $5 billion of cash flow from operations we're still – that's what we're projecting right now. There are some quarter-by-quarter fluctuations that may occur, but right now, we still think that's a good plane number.

On our capital deployment of $2.7 billion, we said there's about $250 million of that of IT, roughly 40% or so are routine, and then 50% to 60% in terms of growth capital deployment. And as Milt said in his comments, that's spread among program development, access points and building new capacity.

So when you take IT and routine, it's roughly 45% or so of our total capital, and the balance being growth capital deployment..

Yeah, and let me add – this is Sam. Let me add one thing to what Bill just said.

I think HCA has a very diversified capital allocation strategy in general, but specifically to our capital expenditure allocation strategy, it too is diversified across markets, across service lines and across different kinds of facility base, and that creates a very conservative confident level of allocation for the company, in my opinion..

All right. Chris, thank you very much..

And I think with that, we'll call it a day. Mark is here, so we look forward to seeing some of you at the conferences that are coming up, and you all have a good day..

This concludes our conference. Thank you for your participation..