Victor Campbell - SVP Milton Johnson - Chairman & CEO William Rutherford - CFO & EVP Samuel Hazen - COO.

Whit Mayo - Robert Baird Sheryl Skolnick - Mizuho AJ Rice - UBS Chris Rigg - Susquehanna Financial Group Frank Morgan - RBC Capital Markets Joshua Raskin - Barclays Scott Fidel - Credit Suisse Andrew Shenker - Morgan Stanley Joanna Dodger - Bank of America Gary Taylor - JP Morgan Ana Gupte - Leerink Partners Sarah James - Wedbush Securities.

Good day everyone. Welcome to the HCA Second Quarter 2016 Earnings Conference Call. Today's conference 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, Adam 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 to the webcast.

And with me here this morning with me is our Chairman and CEO, Milton Johnson; Sam Hazen, our Chief Operating Officer; and Bill Rutherford, our CFO. 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 press release that we issued today, 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 second quarter earnings release.

As you heard the call is being recorded. A replay will be available later today. With that I'll turn the call over to Milton John..

All right thank you Vic and good morning everyone joining us on the call and the webcast. I hope each of you has the opportunity to review HCA second quarter results release this morning. I made a few comments on the quarter and our thoughts on 2016 data and then turn the call over to Bill and Sam to provide more detail on the quarter's result.

Net income attributable to HCA Holdings increased 29.8% to $658 million or a $1.65 per diluted share, a 39.8% increase compared to $507 million or $1.18 in the prior year second quarter.

As noted in our second quarter release, we recognized $4 million tax benefit or $0.11 per diluted share related to the early adoption of the new accounting standards which reduced our provision for income back to us. Adjusted EBITDA totaled $2.052 billion, an increase of 2.2% over the prior year.

We experienced volume growth in both our admissions and the business although at a more modest growth rate as compared to each quarters. Same facility admissions increased 0.6% while same facility equivalent admissions increased 1.6%. Same facility emergency room business increased 4.1% over last year second quarter.

Inpatient and outpatient surgery volumes reflect solid growth over the second quarter last year. Total surgery cases grew 1.6% on a same facility basis. Sam will provide additional comments on our volume trends in just a moment.

Once again we experienced strong growth and cash flow from operations totaling $1.349 billion compared to $1.057 billion in the prior year second quarter, an increase of 28%.

With only $663 million capital expenditures and $1.237 billion to purchase 15.506 million shares which included $750 million for repurchased 9.613 million shares during the quarter. We have repurchased a total of 24.427 million shares in 2016 at an average price of $76.4.

We had approximately $750 million remaining on our $3 billion authorization on June 30, 2016 and also during the quarter we purchased 3 hospitals in the Dallas Fort Worth and Austin Texas markets which we believe will broaden the strength of our market presence in the future.

We expected the inpatient and outpatient services growth in our markets in the years ahead. We are committing capital to meet this increase in demand. For example we recently announced a $650 million capital commitment about Miami state and Palm Beach and county facilities to expand and upgrade our patients service offerings.

This includes the construction of a new facility on the campus in Melbrook Southeastern University in Florida along with several other expansion and facility upgrades within the markets.

These investments will allow us to better serve our communities, respond to the growing demand for healthcare services and provide the highest level of patient care experience. I want to take a minute to recognize a number of senior appointments we have announced over the past quarter, all of whom have been promoted from the HCA.

Due to retirements, we have made the new division president and addition we announced the new Senior Vice President of Employer Engagement. These are all seasoned professionals with many years of experience in their discipline and in HCA.

They know our culture, they understand our business strategy and I am extremely pleased that we have a big bench to ensure strong continuity. So, congratulations to all of them.

Now moving to 2016 guidance, primarily due to volume growth at the low end of our expectations during the first six months of 2016, we are reviving our full year 2016 guidance expectations. As noted in this morning's earnings release our revenue range is now estimated to be between $41 billion and $42 billion.

Adjusted EBITDA is now expected to range between $8.1 billion and $8.3 billion and our adjusted EPS range is now estimated to be between $6.40 to $6.70 per diluted share, reflecting increased net income, share repurchase and the favorable impact of change in accounting status to forward our tax-rate for the first 6 months of 2016.

Our guidance for capital expenditure for 2016 remains around $2.7 billion. So, with that I will turn the call over to Will. .

Good morning everyone, I will add to those comments and provide more details on performance and our health in the quarter. As we reported in the second quarter our same facility admissions increased 0.6% over prior year and equivalent admissions increased 1.6%. Sam will provide more commentary on volumes in a moment.

But I will give you some turnings by [ph]. During the second quarter same facility Medicare admissions and equivalent admissions increased 1.2% and 2.1% respectively. This includes both traditional and both management Medicare. Managed Medicare admissions increased 3.9% on same facility basis and now represent 33.5% of our total Medicare admissions.

Same facility Medicare admissions and equivalent admissions increased 0.5% and 2.1% respectively in the quarter which is fairly consistent with our recent trends. Same facility self-pay and charity admissions increased 5.7% in the quarter and may represent 7.5% of the total admissions compared to 7.1% in the second quarter of last year.

Year-to-date, our same facility uninsured admissions are up 7.8% in the same period last year. Managed care and other which include exchanged admissions declined 1.6% and equivalent admissions declined 0.8% on the same facility basis in the second quarter compared to the prior year.

On a year-to-date basis same facility managed, other and exchanged admissions of prior year and equivalent admissions are up 0.9%.

Same facility emergency room business increased 4.1% in the quarter compared to the prior year and the same facility self-pay, charity and ER business represent 19.4% of our total -- in the quarter compared to 19.3% last year.

Intensity of service or acuity increased in the quarter with our same facility case mix of 3.9% compared to prior year period. Same facilities surgeries increased 1.6% of the quarter and same facility inpatient surgeries increased 1.8% and outpatient surgeries increased in 1.5% in the prior year. Same facility for equivalent admission increased 2.1%.

Same facility managed care and other including exchanged, revenue admission increased 5.8% in the quarter. Same facility charity care and uninsured discounting increased $863 million in the quarter compared to the prior year.

Same facility charity care discounts totaled $1.097 billion in the quarter, an increase of $207 million in the prior year period while same facility uninsured discounts totaled $3.085 billion, an increase of $656 million over the prior year period.

Our total uncompensated care trends which you call bad debts, charity and uninsured discounts combined have been consistent over the past 4 quarters. Now turning to expenses, expense management in the quarter was good. Same facility operating expense for equivalent admission increased 2.4% compared to last year second quarter.

Our consolidated adjusted EBITDA margin adjusted for share based comp and income was 20.5% for the quarters compared to 0.7% in the second quarter of last year. Sequentially it has increased 40 basis points from the first quarter of this year. Same facility salaries for equivalent admission increased 2.4% compared to last year second quarter.

Salaries and benefits as a percentage of revenue increased 10 basis points compared to the second quarter of 2015.

Same facilities supply expense equivalent admission increased 0.9% in the second quarter compared to the prior year period grow in surgical volumes and impact in its volume growth was offset by several supply change initiatives and this help leads to supply cost in for some revenues increased 20 basis points versus prior year period.

Other operating expenses as a percentage of revenue increased 30 basis points from last year's second quarter to 18.0% of revenues primarily reflecting a year-over-year increase in our professional fees that we discussed on our first quarter call. However, other operating expenses as a percentage of revenue has remained level for the past.

We recognized 5 million electronic health record incomes in the quarter compared to $18 million in the last year second quarter consistent with our expectations. Let me touch briefly on cash flow. We had another strong quarter with cash flow from operations totaling $1.349 billion.

Year-to-date cash flow from operations $2.748 billion or 32.4% increase from prior year. Cash flow from operations is benefitted by a $118 million on a year-to-date basis due to the adoption of the accounting policies about excess tax benefits related to the settlement of equity.

At the end of the quarter we had approximately $1.98 billion available under our revolving credit facilities. Debt to adjusted EBITDA was 3.9 3 times June 30, 2016 compared to 3.85 times at December 31, 2015. I also want to highlight the earnings per share results.

For the quarter our diluted earnings per share before considering losses on retirement of debt, legal claim cost and gain or losses of same facilities increased to $1.66 per diluted share from a $1.37 in the prior year period.

When adjusted for the $0.11 benefit, the adoption in the near counting policy represents a 13% growth over prior year in the quarter. These strong cash flow trends, balance sheet provisions and EPS sops results highlight an important strength of the company. Let me touch briefly on Healthcare reforms.

Health reform and care continue to grow in the quarter. In the second quarter we saw approximately 13,300 same facility exchange admissions as compared to the 11,600 we saw in the second quarter of last year or a 15% year-over-year growth. You may recall you saw about 12,500 exchange admissions in the first quarter.

We saw approximately 54,000 same facility exchange ER business in the second quarter compared to just under 45,000 in the second quarter of 2015. And just under 50,000 in the first quarter of 2016 so overall each of these trends are tracking in line with our expectations.

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

Good morning, I will start again by giving you some of the quarterly volumes stats that I normally provide on these calls. Once again the company continued to have broad based growth across our market and broad based growth across the various service lines that make up our business.

For our domestic operations on a same facility basis, 10 to 14 division tech growth in admissions, 11 to 14 growth in adjusted admissions and 12 to 14 division tech growth in emergency room business. Pre stating emergency room as it grew 27% and accounted for approximately 50% of our overall ER growth. Hospital based emergency room business grew 2.2%.

In addition to the strong portfolio performance, the company's across the diversified service line was also strong. For domestic operations on a same facility basis, inpatient surgeries grew 1.7% which increased surgical admissions to 28.6% of total in the quarter, an increase of 130 basis points.

Surgical volumes were particularly strong in cardiovascular, orthopedic and general surgery categories. Outpatient surgeries grew about 1.4%, both components of the service line, hospital based and our division had solid growth. Also, same facility outpatient endoscopic procedures grew 1.6%. Our health admissions grew 3.7%.

Rehab admissions grew 1.7%, cardiology procedure volumes grew approximately 2%, trauma volumes grew 14%, observation business were up 7.5% and finally company's emerging care business on a non-same facility basis grew 11%. Two related service lines experienced declines in the quarter.

Deliveries were down 1.5% in the quarter and neonatal admissions declined 2.6%. Overall average length of stay increased 0.6% which was driven mainly by the growth in our equity index. We believe our efforts in developing a more comprehensive and complex level of services across our provider networks are driving this increase.

I would also note that our inpatient market share for the year ended 2015 shows that ATA continues to gain share in total and across most of its markets. As stated earlier our volume growth, in particular inpatient admissions was at the lower end of our expectations.

Most of this can be attributed to 3 areas but before I explain them, it is important to note that the second quarter last year was very strong and presented a difficult comparison with inpatient admissions up 4.1% and adjusted admissions up 4.9%.

First growth in emergency rooms business in our hospital base units slowed as compared to the past few years. As a result downstream growth in inpatient admissions through the ER was not as strong as compared to recent quarters. We believe most of the softness can be explained by three factors.

First, a slowing in demand growth to more normal rates, second new competition in several markets and third in a couple of our Florida we have experienced the change as how certain Medicare advantage payer classified the patients between inpatient admissions and observation status.

The company continues to execute a comprehensive agenda to grow our emergency room business which we believe is a service line with strong overall demand growth. Second, growth in our behavioral and service lines were also recent wins.

We believe that this year's mostly a result of capacity constraint caused by clinical staffing and a lack of bed for the few of our behavioral units. On the rehab side of the business the issues are not as easily categorized.

We have not opened as many units this year as compared to past year and we are seeing some modest impact in the few markets from the CMS pharma initiative. We continue to invest and recruit talent with the service lines with which we have solid growth prospects in many of our markets.

And finally women and children admissions were down as indicated previously. The primary reasons are broad based software's and deliveries with downstream decline in neonatal admissions. Some competitive issues in the few markets and general decline in the theatric volume due to a milder respiratory season as compared to last year.

These services continue to be an important part of our overall network strategy and we believe the company is well positioned to compete effectively in these areas. All in all the company continues to have solid top line growth and sustained market share gain.

Our growth agenda is comprehensive, is well resourced for capital spending and marketing and we continue to execute it at a high level. We believe the company has solid growth prospects across the uniquely diversified portfolio of our markets and service lines and we believe our local provider system is well positioned to capitalize on them.

With that let me turn the call back to Vic..

Thanks Sam, I don't know if you have come back on and we will start taking questions ask you as well, we would like to choose questions to one at a time so everyone gets an opportunity. .

[Operator Instructions] We will first go to Whit Mayo with Robert Baird. .

Thanks, good morning. My question is on cash flow.

Just really curious on how you expect cash flow from ops to trend this year and really to co-relate to this question is maybe this range of free cash flow after not controlling interest and did that really change after the second quarter versus your previous expectations?.

Yes, hey good morning Whit. As we look at cash flow from operations obviously it's been very strong year-to-date. We are encouraged and anticipate that strength to continue.

We have previously said cash flow from operations to be about 5.5 to $5.5 billion; I think we are still within that range and free cash flow being around that to $2.2 billion what we anticipated at this stage of the year. .

Great, so no change to that?.

No..

Okay, thank you. .

Thanks Whit. .

Hey, Whit let me just add one more. Other than the impact of the accounting change that we have talked about, we haven't projected for that for the balance of the year. .

Okay, thanks. .

Next we will go to Sheryl Skolnick with Mizuho..

Great, thank you so, we all knew it was going to be tough to go up against the great and on volume but I would like to delve into that because you know as volumes go so goes everything else. If I could just recap and ask the questions.

First, I think what we are seeing here is no growth across the broad range of types of admissions and payer types but softer than you had expected.

I think I heard today that managed care admissions were down so I would like some explanation of that as where it happens and whether or not it's likely to be sustained? Third, we heard you on the other side of this talk about capacity constraints and I am wondering to what extent your capacity constraints is limiting your term growth and what your plans are for investing beyond Florida to what you have announced, you offset that and then fourth you have this fact that you are investing in capacity so, there is a bit of a mix message here the way I am seeing it that you know, yes on the one hand you are pulling in guidance prudently to request a little bit less restraint but still grow.

On the other hand, I hear what you are saying about investing in capacity so it sounds as if there might be a demand story here and a continued execution story so could you tell us what we should think about the near term versus the long term growth and expectations you have for volumes and how we should think about the company in that context?.

Sheryl thank you, it's a great question.

Will do you want to lead with this?.

Yes, I am just kind of give some additional color details in this. But first of all I think you are right Sheryl, what we are saying if we were growth in by its longer term standards, I think very solid growth and I think hopefully we are expressing that this morning. But by recent growth standards, we see it slowing.

We went through over past 5 or 6 quarters that was exceptional and we saw demands in our markets growing and we suspect although as you know our market share data lacked about 6 months but we suspect we were going to see some flow in demand in many of our markets and that's why we are seeing it show up in our numbers.

That being said we still have a great outlook and a very optimistic outlook for the long term in our markets.

Our markets are growing in terms of population and I think we will continue to see demand in our markets and so we are going to invest to meet that expected demand and we have certain markets I know Sam can give some color in the South Florida markets where we announced the $650 million investment.

While we are doing that, and Sam can describe that to you in just a minute but we still think our markets were well positioned in our markets and we are going to invest to make sure we stay well positioned in these excellent markets in which we operate.

So Sam, you want to add more color into that?.

I don't think though in the second quarter, capacity constraints played a broad based role in the softening. There are pockets where we know that difficult day in and day out to manage the capacity challenge and that could in fact squeeze out few patients here or there but in total I don't think that was a material impact in the quarter.

we have a very sophisticated approach to capital expenditures, we have capacity triggers, we have triggers that we use in determining whether or not we should consider capital of particular situation, and so that process continued nothing's changed, we monitor that in the context of macros within the market a strategic approach within the at a micro level and all that we did the capital decision.

Capital take a while to get into the marketplace on average you know 18 to 30 months, depending on the project because we usually doing it to existing assets, so that's timing is a bit ahead, also I think at the point capital property company, but it specifically giving the example of the quarter, what we've done there and have been approved we package them up because we thought it was a very sign of a commitment in a very effective methods for constituent in that market, but without market is the largest healthcare demand market in HCA, so Miami is a big market, we have the largest position in Miami with our market share globally, our volumes over the past five years have grown significantly or at 25%, we have a number of our key institutions they are running 85% and 90% inpatient occupancy, over that time period have grown almost 250,000 visits, almost 50% , it is a large commercial market, so for us and when you look at the macro in we believe we have to get the capacity in play in order to sustain growth over time and in that how we think about these investments, and this is just a very solid sort of micro if you will of a number of markets and the number situation inside of HCA and how we approach it.

But capital is a very important part of market share gains is very important part of continuingly satisfaction, especially our physician and obviously our patients in that they have the kind of facility, Presentation and the technology needed and it continue to play a big part of our overall efforts to grow market share, and position our company to be effective in delivering care in competitive in the market place.

.

Also refine this please to answer the other part of the question, how should we think about the near term volume outlook for the company's versus the longer term volume outlook and can you just go through the managed care and what happens there?.

Well, I think our managed care, we were modestly there and that a little bit below where we expected this year, I mean the last six quarters have been incredibly strong for the commercial demand stand point across all of our market, and in the commercial volume inside of HCA.

We knew that was going to paper, we didn't know when exactly and how much and I don't know that the second quarter necessarily reflective of any near term volume trend with respect to that, I mean the second quarter last year with a very strong commercial volume growth and so that was part of the challenge here we have a couple of markets where there's been some trends changes, the observation issue in the global market impacted our admissions statistic a bit, and that that part of it a couple of taxes market have some, but not materially different than the company has a whole in Las Vegas two of our hospitals – two of our competitors have now re-entered a provide care-contract that previously they weren't in, and we lost a little commercial business there.

so there's all these little component that playing to our number but I think that demand will normalize in that trend we think in that short run the intermediate run, our commercial oddity somewhere between one and two, how we think overall demand it 2 to 2.5 potentially, but you know we're not to see some data in the first quarter this year to fully validate those assumptions, but that's where we believe the trends are for the HCA market.

.

Sheryl, one thing I might just add and that is as we all know the health exchange admissions really grew last year, they get small piece of the company, but if you look at what they added to admission growth last year the second quarter verses this year, while we're still so that's also one factor to keep in mind when you start talking about last year..

A big bill 2.4% up year-to-date on our admission growth, you recall we gave guidance of 2.5, so we're at the low end of that range and so you think about the short term the next six months you know we think we can finish within the range, but it was quiet in the lower into….

Thank you so much. .

Next we'll go to AJ Rice from UBS..

Hi, thanks. I might switch gears and ask you about update on the payer side I wonder you mentioned about some pressure from managed care in Florida on observations days which we've heard from some of the others.

Can you broadly comment where you had a contract with managed care guys be aggressive on utilization review and then you mentioned Sam I think in your comments about under payments and what you're seeing there can you comment on the government initiatives around….

Okay, we are of that 75% 2017 again as consistently sent the past year terms, we're about 15% contract on 2018 similarly, as far as the component of that we are you know not seen any substantial changes in structure, or provisions inside of those agreement, on the observation status issue with more Medicare advantage issue as it was a non-Medicare issue, a little bit on the commercial but not as much, it was more Medicare advantage, but a little bit on the commercial side of that, We're not convinced yet that we're being equitably dealt with on some of those status when you are working with the payers to get a more clinically driven protocol around those, and that we believe will normalize at some point, but none the less that out there is the issue that it had been an issue but it is a little bit more advanced I think in the second quarter.

So that the payers side.

On the part of payment issue -- again it's hard I have current data, this is a very sort of slow moving data driven process with the government, what I was speaking to put in particular on our only in a couple of markets have we've seen the program the fundamental initiative pilot program have a modest impact on what falls into our rehab centers, there have been some component of our participation in those pilots where we see some modest adjustment in post-acute care referral patterns, again it's across the different components of post-acute.

On the other side is way too early to be able to understand what the implications are there, we're just starting to get in the game and again we have seen some modest changes in referral patterns but not to the point where HCA, we believe that compromises the opportunity to develop, we have so and fully integrate that to other components of our business, so orthopedic is an example is not the only driver of rehab business for HCA, Trauma is the driver, clients is the driver, deliver downstream rehab business, and from the standpoint we have little bit drag with -- with the program which got a lot of business opportunity on inside the justified our investment.

Rehab admissions -- great deal 1% of our total, so it doesn't really at all..

Thank you. .

Next is Chris Rigg of Susquehanna Financial Group..

Good morning I just want to ask about labor doesn't seem like you guys are having any issues but given some of the issues that have been discussed by your peers would love just going to transfer what you're seeing in the market and that just you know overall labor. Thanks..

Thank you. We are very pleased with the last three quarters of performance our management teams in the field they have responded in a very effective way, as you see in our income statement we have been able to maintain our productivity levels, we've been able to maintain our margin level if you will with labor over those periods of the time.

And we still facing some level of challenges, obviously we are using more contract labor than we want, however contract labors for the company has stabilized over the last four quarters, and actually for unit basis for the second quarter was below the first quarter, when we look at contract labor for just a patient day.

And retention is a big focus inside our company right now, we have opportunities to enhance our in retention and we have seen an early signs of improvement at a number of hospitals that we are focused on, we have a second workshop for another 20 hospitals inside of HCA, and we're optimistic that will start to see some leveraging best practices in performance there that will over time I think help address some of these challenges, our recruiting function inside of HR continues to improve and get more agile in responding to dynamics in the market, we do have pockets of challenges with wages that we have to step up to deal with, some of those are being dealt with as we speak, some of them been dealt with over the past few quarters, and some of them we will be dealt with in the future.

having said that I don't think there's going to be a material change in our composite average hourly rate across the company, it could you know move a little bit from one quarter to the other but largely it is in the zone of really anticipated and we believe it to be manageable. .

Thank you..

Next we have Frank Morgan of RBC Capital Markets..

Good morning, a lot to of good color on the top one issues and obviously you mentioned labor, I am just curious over bad debt side, can you talk a little bit about what you're seeing there and notice that sequentially you provision was down but it's not like any color there? Thanks..

Alright, thank you frank, and Will you want to..

Sure. As we look at that you could see you know it's 5.7% for the quarter and year-to-date basis fall in right in line with our expectations.

When I look at uncompensated care that uninsured combined as I mentioned in my comments that I look at one of the past three and even in to Q3 of last year, it remain very stable, when I look at our uncompensated care as a percentage of our adjusted revenue you know it is it relatively flat for the past three quarters, we anticipate on volumes to track with -- that's what exactly is happening so, you know I'm I wouldn't really call labor environment is very stable for us at this stage, our teams are doing a great job as we continue to manage the collection – collectability in the revenue cycle for the last three quarters has remained very stable.

.

Thank you, Frank..

Now over to [indiscernible]..

Good morning thanks for taking my question, as we head into 2017 maybe discuss your expectations for exchange enrollment and any challenges they might see from some….

Alright, thank you..

I'll try another scenario, obviously it is still early to predict what will happen in 2017, we've always said that we think our exchanged activity will track with enrollment, and you know so far we haven't really seen material markets in that for next year , there is implant market by market but I hadn't really kind of raised up as a material issue for us right now, so I really think we have to see what the enrollment trends are going to be in projected for 2017 to kind of estimate whether or impact it is for us I'm not so sure in comments that we've seen in the market of exchanges early stage material, I don't know exactly what the impact would be in 2017, however we have added some payers here and there, we will lose some payers as they exit and I'm hopeful that our network is broad enough in order for us to absorbed those and we can maintain our market share hopefully even re-position our market share in some cases.

We'll have to wait see exactly how the exchange shake out. .

Alright Jerry, thank you..

Thank you..

Our next question from Joshua Raskin with Barclays..

Hi thanks.

Good morning, question around the outpatient surgery volumes, you know it became a little impatient this quarter and I think I heard it was -- curious maybe more specific on the surgery centers you know what you guys are saying in terms of volumes in any initiatives or anything specific in any of your markets that's causing that changing trend?.

It actually is more on our historical trend, the first quarter was uniquely high we could put our fingers the way on exactly why it was this high it was, but the second quarter was more on our historical trend, and it was very balanced between our hospital towards surgery centers, our growth is fairly broad based across the different service lines in those centers and in our hospital, we have a number of initiatives are all are choice of initiatives continues to yield value for us, it is a satisfactory position and helping our patient flow patient satisfaction.

Secondly, we are in an acquisition on inventory surgery centers and endoscopic centers and it added over the course of the last 12 to 18 months a quite a few additional units, and we look at our composite none things towards surgery center growth in the second quarter was about 1.5% which reflect some of the acquisition that we've done, we believe that it will be very strategic to position alignment, greater outreach in the commercial segment is just advancing larger network of offering HCAs market.

So we're very pleased with the result with second quarter and we believe we still have opportunities to grow outpatient surgery volumes with our different initiatives. .

The next question comes from Scott Fidel with Credit Suisse..

Thanks, actually another thought question on the exchanges I know that already you asked about the volume outlook just interested if you can talk about on the reimbursement or the rate outlook with the payers whether you seen any sort of change in posture from them, in particular just interested on the blues on you know given all the losses that they've had and they come back and try to renegotiate the rates or you know you are not really seeing any changes on the exchange side?.

Well, all of our contracts negotiations are a bit different depending on the market, depending on the circumstance but I mean in general that hasn't been any Dramatic changes in our contract -- I think a reimbursement per unit is in line with our expectations this year, and we anticipate that being the case for next year as well, so – I mean there are pockets here and there recently made an announcement about some challenges with their exchanges, we have a little bit of business what they have done in the exchanges, we tend to deal with the local state policy more than we do Texas, Florida, Tennessee, Kansas city places like that it so it's not really an issue as much as it is how the -- how the local policy, their pricing challenges and medical loss ratio issues and so forth, but in general for HCA there's not a lot of change.

.

[Indiscernible]..

Thanks, good morning I just wondered the guidance, if we look at just the mid-point it would call for out 5% EBITDA growth in the second half of the year verses that you know low twos you've had in the first half so I do not know do get easier given for the pressures in the third quarter but can you talk about maybe other areas that give you comfort around that growth just given the slowdown in the top line and then maybe some of the continued cost pressures, anything to consider seasonally high-tech dollars anything like that 5% growth? Thanks..

Yes right, it implies that 5% growth to get to the mid-point, I think one of the major factor he touched on to get easier especially in the third quarter, last year we were a little bit solid so we should have a think will prompt for the third quarter, but you know when you look at our -- we have factors all the kinds of into our guidance and where we think we can achieve the outcome for the second half of the year.

But I don't -- maybe a little bit of seasonality typically that we see in the second half of the year, the fourth quarter especially, that obviously a trend we see every year but nothing with high-tech or anything that would call out that would be outside of normal operations would be contributing to that -- to that expectation for growth in the second half of the year.

Fourth quarter of last year was a big number for us, so as we revised our guidance, we think the midpoint range we're at is not reflective of what our current trends, but we're comfortable with that..

I will say one thing, too, that should help. It's on some of the contact library shoes that we dealt with in the second half of last year as Sam described. Although we still have opportunity to contact, it is moderating in terms of stable, in terms of where it is.

We better relate in the second half of the year relative to the content contract label as well..

Next, we'll go to Andrew Shenker with Morgan Stanley..

I'm just wondering and talk a little bit more about the supply margins. Did you guys call the -- you've talked about continued supply chain initiative, but supplies as a percentage of revenues is pretty much declined almost every year for almost a decade now.

How much more options are there that's really just continuing to push through better pricing given the GPO? Are there other strategic moves that can continue to drive this measure down or at least continue to slow the growth of supply versus everything else? Thank you..

Hi, Andy. Thank you. Will, you want to....

Yes, let me take a first shot. As you know, supply costs us percent of revenue. Year-over-year we had 20 basis point declines. When I look at it for the past four quarter, we're pretty consistent, 16.7 in Q2, 16.7 in Q1, 16.4 in Q4, 16.7 in Q3.

It's very sustainable and we do think that's accomplishment given the continued intensity increases in volume growth that we've seen over that time. Our supply chain team as well as our field operators have done an outstanding job from a variety of aspects around supply chain. First, relatively or GPO in contracting.

We still have momentum in the marketplace with Health Trust Purchasing Group and that continued to have a lot of strong performance and then our supply chain operations are really a key component of our supply chain story.

We've spoken recently at one of our recent initiatives around pharmacy consolidation where we can help control the pharmacy spending utilization of inventory. That is paying great dividends. It's that initiative is rolling through the marketplace.

We've also got initiatives in the operating suites, as well as other initiatives around our performance improvement activity. When you couple supply chain initiatives operationally with the contracting statuses going on, I think that's all leading to us being with at least maintain our margins on a supply cost line and remain the stability.

You'll do recall last year we did speak in the third quarter of some pharmacy cost elevation with our pharmacy cost per adjusted emission or adjust-to-patient day with elevated in the second and third quarter of last year, mainly due to some high cost drugs that obviously have a lot of press around that.

We've seen those pharmacy cost trends moderate over the past couple of quarters in response to some of just the public pressure on those high cost drugs. That is also benefiting our year-over-year comparison..

Let me add one comment to that. I think it's about other area of opportunity for HCA. Our clinical data warehouse, the number of our quality initiatives have sort of supply cost utilization, drug utilization, bad practice identification and so forth attached to it.

As we engage our positions more than we've done in the past, they're understanding of how it helps them, how it helps their facilities, how it helps their patients is another opportunity that I think we're in the early stages of execution on our supply costs.

Married up with what Will just talked about on contracting supply chain operational management, coupled with data and insights connected to our positions is a very powerful combination that we think still had headwind..

All right..

The next question comes from Kevin Fischbeck with Bank of America..

Good morning. This is actually Joanna Dodger filling in for Kevin.

Just a quick question on your volume out of -- do you expect to be still slow and -- but for Dan, can you also comment on the pricing out? Because it seems like the first two quarters also are coming in towards the lower end of the guidance that you provide us for that full year, but at the same time it seems like at the same store increases have been pretty solid.

Any color on pricing you might give? Thank you..

Joanna, thanks to you..

I'll start in that. When we gave her guidance, we anticipated our revenue per adjusted emission to be 2% to 3%. Year-to-date, we're at 2.1%. We reported that number in the second quarter. When I look at a longer term view, that's right in range. We've had some quarters a little more to that, some within range.

Sam talked about our visibility of our contracting for 2017 and 2018 for pretty consistent terms. So when we look at pricing measured by a revenue for adjusted emission, it's within our range and I think within our trend that we've seen over the past four to six quarters..

I would add that in the second quarter, it probably wasn't as strong because of payer mix with this commercial volume being down a bit. Obviously, that's -- and in the delta there can create a little bit of a boarding if you will, making positive number. But within our commercial book like where we thought we would be and actually a bit better.

Thank you..

Our next question will come from Gary Taylor with JPMorgan..

Hi, good morning. I had a couple clarifications and then my real question. Just the first clarification, is it does look like Bill, year-to-date, you're favoring discounts over bad debts at least versus kind of a seasonality in the first half. I know the total write-off looked fine.

But I just wondered if there was any policy-change or anything that was driving the much slower bad debt number that obviously is offset by the higher charity discount?.

I'll take down, Gary. No policy changes relative to our recognition. In any period, they're sometimes subject for news between non-insured discounts charity and bad debt.

Bad debt in second quarter is very consistent with our Q1, but really no year-over-year changes and that's why I think it's best to look at the portfolio including all three of those and that's why they're consistent. But no changes.

Again, at any period, you're subject to maybe some of that in your uninsured discount line versus bad debt, but not policy changes related to that..

Gary, you're pretty clever; two clarifications in one question. I think that's story. I'm going to give you points than not..

The last part of it, Sam was talking about labor cost trends. I saw it and I didn't know if any of that included any anticipated impact from the new overtime rules in December as that goes in the 2017. Does that create a view that....

The overtime rule for us are very immaterial and present not even….

Okay. Then my real question, your comments on the new cardiac bundle and what your approach has been with orthopedic bundle.

Are you just contracting with besting [indiscernible] providers in your market and this will be a capital light investment to coordinate the risk that you're assuming there? Just your comments on how you'll approach me?.

Well, I think on the -- varies by market a bit. We are trying to work with our physicians to identify the best course of action for our patients whether that's the type of -- how we interact with them from the hospital and so forth. It's very, very early in understanding how impactful those are.

As we transition, we just got the rags on the cardiac thing, it's 700 plus pages of rags I think. We haven't got a chance to study that yet.

I think one new launch for us with cardiology versus orthopedic we employ large number of cardiologists across HCA and our ability to integrate with them may be a bit easier than it is in some respects with orthopedics, which we don't employ as much. We'll just have to wait and see how that plays out. That's still a proposed rule.

We don't know if its impact will go into effect and what the final rules will be on the cardiac side. We're prepared, we've invested in infrastructure, corporate offers in our divisions, we've educated, we've put policies and procedures in place on a CJR. We'll hopefully see where it goes over the next 12-18 months..

Gary, thank you. All right, shot clock home. We got time for about two or three questions..

Next we'll go to Ana Gupte with Leerink Partners..

Yes, hi, thanks. Good morning. I had a question on the managed care and generally the industry trend around moving to lower cost service. So when you have 1.5% or something outpatient surgery, the inpatient is in the same range.

Can you give us some color on the breakdown between the freestanding clinic and versus the outpatient department, and what the price distinction is, and how much of a volume increase do you need to overcome the price difference and if that won't -- in addition to the mix with government putting pressure on your prices..

I'm not prepared to give pricing between the two units. I mean, it's ASCs are a bit less priced -- lower priced than our hospitals. And that's because of some of the infrastructure requirements that it takes to operate a hospital base here, and capital requirements are different, and so forth.

Both components have about 50% to 55% of their volume in commercial patients. So outpatient business is predominantly a commercial booking business. A number of our surgery centers have broader clinical capabilities and can provide the type of care that our hospital base units, but others can't.

They don't have the nursing, they don't have the backup, the physicians aren't comfortable operating on certain types of patients and so forth. So there's all these nuances that go into it. Ambulatory surgery centers have been in our market for a decade, and this dynamic has always existed.

So we've got the right balanced approach, we believe, inside of HCA, to be able to respond to respond to physician needs, patient needs, payer needs, with our network and we continue to add to both..

Thank you. That was helpful..

Let's go to Sarah James of Wedbush Securities..

Thanks. You've been focused on growing the ASC footprint and about the commitment to investing in outpatient.

So if we take a step back and look at where you're putting capital to work, how do you see the acuity mix or mix of inpatient/outpatient changing for HCA over the next five to ten years?.

Fundamentally, the Company has a strategy to enhance the clinical complexion of our facilities. And by that, I mean advancing into deeper capabilities. In many markets, we are adding the service lines I'll call horizontally where we bring on new capabilities in cardiovascular care, oncology, pediatrics, whatever.

And then vertically, we're deepening those capabilities inside of existing service lines. All intended on being able to keep a patient somewhere in the HCA system if they need deeper care or more complex care.

So we import that out of our Clinical Services group and out of our service line group up here in Nashville, where we can bring technology, we can bring best practices, we can bring a specialized talent to support that. So when I view the Company's inpatient business, I anticipate it getting more acute and more complex over time.

On the outpatient side, the Company has had a very aggressive investment strategy over the last number of years. I think, Bill, our outpatient revenues are pushing 40% of our total.

And so we balance out the $2.7 billion between inpatient capacity, outpatient surgical capacity, imaging capacity, clinical capacity for urgent care, and then also for Emergency Room, which is a big piece of our outpatient strategy as well.

So all of those pieces and parts are connected to really a balanced approach to building out our network and being attractive to our patients and our physicians. All right, thank you, Sarah. It's 9:59. One more question..

Okay, we'll take our last question from Sheryl Skolnick from Misuho, a follow-up..

Very kind of you. So it dovetails on what Sam was just talking about. You've made significant investments in big data and it's highly sophisticated. Obviously, this plays into all of what you're doing. But at some point, maybe this is too long a question to ask call.

But at some point, can you help us understand how the improvements you're making in the quality of care, the outcomes, the lives saved, and the changes you're making to the process will enable you to support higher volumes and better profits in the future?.

Well, Sheryl, you've hit on a subject that I think is very important to healthcare over the next five to ten years and thereafter. We're investing -- we now invest very heavily in that because we see it as, I'll call it a game changer for the healthcare. This is an area where I want to see HCA lead.

And I'm very excited about the early returns and what we're seeing, again, we've invested in the central data warehouse.

If you think about what's happened over the last several years with electronic health records and investments that HCA and other providers have made in moving now to a digital medical record, it's not like stealth one; now we have all this clinical information in a digital format, and what do we do with it? And there's a lot we can do with it.

I'm going to ask Dr. Perlman to touch on a couple, but some things that we're doing around acceptance care and really dropping mortality rates in our hospitals from sepsis and saving lives. It's really happening; it's happening today in our facilities. And so there's examples like that.

So it's, again, we're investing in not only in terms of the technical side of that but the human resource side of that with hiring very talented data scientists to help us take advantage of this.

And then you think you move on from the structured data that we have to the unstructured data, and that's a language processing and, where we can move the needle there is, again, something for the future that I'm very excited about. Dr.

Perlman's here John, why don't you give more detail on that area?.

Thanks, Milton. And that's -- we're really at the point where we can begin to realize what we consider a digital dividend of the -- I mean, each day HCA has always been very operations- and science-driven in its business decisions.

Every aspect of our clinical care can be captured and we can understand better, try better clinical and operational and business decisions.

Bill mentioned Detroit, the gateway into improving care for patients in real time in terms of the ability to capture and even predict a lot of calls are done from the country, number 9 in the hospital, number 3 in ITOs. It really allows us to do save lives.

In that process, it also allows us to drive our processes more efficiently in terms of labor, in terms of the resources used to provide care, the supplies.

It arms our MDs and caretakers with the ability to answer questions and drive our clinical integration forward in a science-driven fashion as Sam alluded to, which is really a requisite for maximizing rate reimbursement. It really is a predicate for success in bundled stock in the future.

It's kind of like the doorway to really personalized dynamic precision medicine. So it's really our mechanism to channel back the inevitable data stream and results from what we do to provide healthcare and use it to drive better clinical operations decisions..

All right, Sheryl. And everyone thank you very much for your time this morning, we appreciate it. We look forward to following up with all of you..

And that does conclude today's conference. We thank everyone again for their participation..