Good morning and welcome to the HCA Healthcare Fourth Quarter 2022 Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir..

Good morning and welcome to everyone on today’s call. With me this morning is our CEO, Sam Hazen; and CFO, Bill Rutherford. Sam and Bill will provide some prepared remarks and then we will take a few questions.

Before I turn the call over to Sam, let me remind everyone that should today’s call contain any forward-looking statements that 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.

More information on forward-looking statements and these factors are listed in today’s press release and in our various SEC filings. On this morning’s call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure.

A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare, Inc. is included in today’s release. This morning’s call is being recorded and a replay of the call will be available later today. With that, I will now turn the call over to Sam..

the first one is advancing our clinical systems and digital capabilities; second is transforming care models with innovative solutions; third is expanding our workforce development programs; and fourth, is investing capital in our networks to expand their offerings.

These efforts are pressuring our results some in the current year, but we believe they are necessary in creating a platform for ultimately optimizing our networks so they can deliver even better patient care in the future. Let me close with this. The last 3 years have been an extraordinary experience for everyone at HCA Healthcare.

There has been no rest nor retreat for our people and it was truly a challenge like no other. I strongly believe however that our Board, our management teams and our caregivers have shined through it all.

We went into the pandemic with two priorities, to protect our people and to protect the organization so we could continue providing high-quality healthcare to the communities we serve. I believe strongly that we showed up, we delivered on these priorities and we did it the right way. I am proud of HCA Healthcare and I am even more proud of our people.

The future for our company is even brighter because of the past 3 years and what we learned. Now we will move into 2023 and the years ahead with greater purpose, with a renewed agenda to drive growth and with more confidence in our ability to deliver value for all of our stakeholders.

With that, I will turn the call to Bill and he will discuss the quarter’s results in more detail and our 2023 guidance..

Okay. Thank you, Sam and good morning everyone. I will provide some additional comments on our performance for the quarter and the year then discuss our ‘23 guidance. We finished the year with good volume metrics. Our fourth quarter same facility admissions increased 2.9% over the prior year. For the full year, our same-facility admissions were up 0.5%.

Excluding COVID admissions, our same-facility admissions grew 5.4% in the quarter and were up 3.4% for the year. For the full year, COVID admissions accounted for 5.2% of our admissions versus 7.8% in the prior year. Same-facility emergency room visits increased 11.4% in the quarter as compared to the prior year and were up 7.6% for the full year.

Our same-facility outpatient surgeries were up slightly in the quarter from the prior year, but increased 5.6% sequentially compared to the third quarter. Same-facility inpatient surgeries were basically flat as compared to the prior year. Both were impacted by 1 less business day in the quarter.

Our same-facility revenue per equivalent admission was down 2.6% in the quarter from the prior year as this was influenced by the drop in COVID activity. Sequentially, our non-COVID revenue per equivalent admission increased approximately 3.7% as compared to the third quarter.

Our case mix increased just under 2% sequentially from the third quarter and our payer mix remained stable as well. We remain pleased with our team’s management of operating costs even with the backdrop of higher inflation rates. Our consolidated adjusted EBITDA margins were 20.5% in the quarter and right at 20% for the full year.

We continue to focus on our labor plans and supporting our teams, while appropriately managing contract labor and premium pay programs. Our total labor cost as a percentage of revenue improved both sequentially and when compared to the prior year.

In addition, our supply cost trends have remained very consistent during the year and we are pleased with these results. Other operating expenses have been subject to some inflationary cost pressures when compared to the prior year, but has run fairly consistent as a percent of revenue throughout 2022.

Our cash flow and capital allocation are a key part of our long-term growth and value-creation strategies. Our cash flow from operations was $8.5 billion in 2022. Our capital spending was just under $4.4 billion for the year, which was slightly higher than our initial expectations due to some year end real estate and information technology purchases.

We paid dividends of about $650 million and we repurchased $7 billion of our outstanding stock during the year. Our debt to adjusted EBITDA leverage ratio was near the low end of our stated leverage range of 3x to 4x. For full year 2022, we realized approximately $1.2 billion in proceeds from sales of facilities and healthcare entities.

So, let me speak to our 2023 guidance for a moment. As noted in our release this morning, we are providing full year ‘23 guidance as follows. We expect revenues to range between $61.5 billion and $63.5 billion. We expect net income attributable to HCA Healthcare to range between $4.525 billion and $4.895 billion.

We expect full year adjusted EBITDA to range between $11.8 billion and $12.4 billion. We expect full year diluted earnings per share to range between $16.40 and $17.60. And we expect capital spending to approximate $4.3 billion during the year. So, let me provide some additional commentary on our guidance.

Our 2023 adjusted EBITDA guidance is impacted by several governmental and policy changes. In 2022, we recognized approximately $280 million in COVID support mainly from DRG add-ons, removal of sequestration cuts and HRSA reimbursement for uninsured COVID patients. We expect very little revenue from these programs in 2023.

Also, as discussed in our first quarter release, we recognized $244 million of revenues and $90 million of expenses related to the Texas directed payment program that was for the last 4 months of 2021. This program that started on September 1, ‘21 was not improved until the first quarter of 2022.

In addition, we estimate the impact of the 340B related payment reductions to be between $50 million and $100 million. Adjusted for these items, the midpoint of our 2023 adjusted EBITDA guidance would be in the middle of our historical 4% to 6% growth expectations that we have had over time.

Within our guidance, we expect our same facility equivalent admissions to grow approximately 2% to 3% and our revenue per equivalent admission to grow approximately 2%. Depreciation is estimated to be about $3.1 billion and interest expense is projected to be around $1.975 billion.

Interest expense will be impacted by both higher rates and anticipated draws under our revolving credit facilities. Finally, our fully diluted shares are expected to be about $278 million for the full year and cash flow from operations is estimated to range between $8.5 billion and $9 billion.

Also noted in our release this morning, our Board of Directors has authorized a new $3 billion share repurchase program. This will be in addition to the approximate $1.5 billion remaining authorization we had under the previous program at the end of the year.

In addition, our Board has declared an increase in our quarterly dividend from $0.56 to $0.60 per share. With that, I will turn the call over to Frank and we will open it up for Q&A..

Thank you, Bill. [Operator Instructions] Devin, you may now give instructions to those who would like to ask a question..

[Operator Instructions] Our first question comes from Justin Lake with Wolfe Research..

Thanks. Good morning. Just a couple of numbers questions here. I appreciate all the detail you have given.

So first, just all thinking about 2023, can you talk us a little bit about what you are expecting for labor expense and maybe delineate the cost on permanent labor versus hopefully the downward trend maybe give us ‘22 versus ‘23 million on labor? And then couple of things, exchanges and redetermination, right, exchange growth has been big redeterminations could be a tailwind at least according to our estimates.

Curious what you have assumed there on payer mix and kind of impacts from that on 2023 guide as well? Thanks guys..

Yes. Justin, this is Bill. Let me start. So as it relates to labor cost, I think as a percentage of revenue, we will keep it on an as-reported basis, flat with where we ran for the full year of this year. We continue to expect improvement in the utilization and cost of contract labor as we go through the balance of the year.

And so I think that’s a good output for us. Relative to payer mix, we think payer mix for now will mostly remain stable. We are encouraged with what we are seeing with the enrollment in the health insurance exchanges and we believe the enrollment in our states, are probably a little bit higher than what we see as a nation.

And so we think we have contemplated that within the context of our overall range, but we are encouraged with some of the payer mix trends..

Our next question comes from A.J. Rice with Credit Suisse..

Hi, everybody. Thanks for the outlook commentary and so forth. Maybe because you have got about a $600 million range on the EBITDA range you are looking at.

Can you maybe talk a little bit about what are some of the swing factors? Do you see those mainly as top line swing factors that would get you to the high or low end or is there expense management, open questions in your mind? And specifically on the labor, you have got quite a bit of a decline in the contract labor from what you spent in ‘22 versus presumably the run-rate for ‘23.

How much of that are you baking into the guidance versus how much are you saying you have got to redeploy to support permanent labor?.

A.J., this is Sam. I think on the guidance, I mean, we have got 2.5%, I believe, on either side of the midpoint. The top side of that range I think is achievable if our volume and labor agenda happens maybe a little bit better than what we anticipate.

The low side of that range would be greater inflationary pressures and maybe some more challenges in a tenuous labor market. Those are sort of the big variables, if you will, in the equation. I mean, it’s a fairly big number to begin with and again, the 2.5% range on either side of the midpoint we think is not unreasonable.

So to consider it to be very wide seems maybe to not fully appreciate some of the variables inside of it. With respect to labor, yes, we have made significant investments in our people.

We did that throughout last year mainly in the late summer, early fall, where we adjusted our wages to deal with movement in the market resulting from some visibility that we had with our overall competitive positioning.

Some of the contract labor reductions that we expect and have already made even will be absorbed a little bit in those decisions, but we think the net of it is what Bill just alluded to, and that is that we can maintain our labor cost as a percent of revenue roughly around what we finished 2022 at. So that’s how we’re thinking about it.

And again, we’re seeing positive metrics across the key dimensions of our labor agenda that is encouraging to us. And we believe we have more room to gain with our agenda, and we’re hopeful that, that will continue throughout 2023..

Okay, thanks..

Our next question comes from Gary Taylor with Cowen..

Hi, good morning. Two quick ones for me. Bill, I know you said contract labor came down again, but I didn’t catch if you disclosed the 4Q number. And then my other one was just also on your comment about the other OpEx line. I mean that’s still a line that on a per adjusted patient day basis is up in the double digits.

So any help you can give us on thinking about modeling that for ‘23?.

Yes, Gary. On contract labor for the quarter, we were down about 16% from where we ran in the fourth quarter of last year. So good improvement in that area. It represented roughly 7.8% of our total salary wages and benefits. We talked about given that number before.

So again, solid trends in the fourth of this year compared to where we ran last year and especially where we ran in the first half of the year. Our other operating expenses, you’re right, are subject to some of the general inflationary increases that we’re seeing across the economy.

When we think about utilities and insurance and, in addition, our professional fees areas, we’re seeing some higher single-digit cost growth in other operating expenses.

Fortunately, if you look across the quarters for 2022, as a percentage of revenue, you’ll see our other operating expenses as a percent of revenue staying relatively and pretty consistent throughout the year.

As we look forward to 2023, we do believe that’s an area that can continue to see some higher single-digit inflationary pressures, and we factored that in to our guidance going forward. Again, we think labor supplies will keep in line and hopefully below where our revenue growth is.

But the other operating cost area is around utilities, insurance pro fees are going to continue to see some pressures, and we factor that into our guidance..

Our next question comes from Ben Hendrix with RBC Capital Markets..

Hi, good morning. Thank you. With regard to capacity constraints, you mentioned last quarter missing out on 1% to 1.5% of total admissions in 3Q.

Can you give us an update on where that stands now? And then maybe some more commentary on progress with your HR and case management initiatives and then the degree to which you expect those to help ease constraints and support your guidance this year? Thank you..

This is Sam. Thank you for that. I mean we did, as I mentioned in my prepared comments, had some moments in the quarter where we were unable to receive transfers in or take certain patients into our facilities. And that was actually a little bit elevated over the third quarter.

We had roughly, using this as the proxy, approximately 2% of our total admissions we were unable to take through our transfer centers and ahead to find those patients alternative solutions where we could. We were busier in the fourth quarter than we were in the third quarter, so that was part of it.

But nonetheless, we still are seeing opportunities for us to improve the throughput through our case management initiatives, as you spoke to, continue to increase the head count in our facilities in order to take care of these patients. And we’re hopeful that those numbers will start to come down a little bit as we push into 2023..

Our next question comes from Whit Mayo with SVB Securities..

Hey, thanks. Good morning. Sam, I wanted to go back to the long-term plan that you mentioned. You talked about advancing the transformation of care delivery models. Can you maybe elaborate more on that, sort of how that may be playing in the physician strategy, maybe a different view into working with MA plans or anything would be helpful? Thanks..

Well, let me give you a little bit of a backdrop on our long-term thinking with in – and I think this going to help you understand why we are investing in these categories. First and foremost, we think we have just an incredible portfolio of communities that we serve. They are growing in and of themselves.

So we have opportunities to invest in that growth. We think demand is going to grow in our markets. Aging baby boomers population growth chronic conditions, all those things unfortunately produce demand in some respect. And we think our portfolio is a little better than the national averages on that front. So we’ve got that as a backdrop.

So there is opportunities, I’ll call it, outside the walls of HCA to invest in that natural growth in demand. The second piece that we believe exists is opportunities inside of HCA. We have what we call an economy of opportunities that exist across our 180 hospitals and 2,400 outpatient facilities that we have.

And that opportunity is to use big data, use better clinical system capability and better analytics to support better care. And so our technology agenda, coupled with our care transformation agenda, is really about tapping into the economy of opportunity that exist inside our organization.

So we think we have two sets of opportunities, outside to continue to grow market share and benefit from the growth in our markets, and then continued improvement in care delivery for better patient outcomes, more efficiency, better operational management in our hospitals by infusing machine learning, advanced analytics with our care transformation agenda.

So our care transformation team is led by a physician and a clinical team with industrial engineers and other type of people who are big data analysts who are supporting evaluating great performance that we have inside our company and really studying the processes around those, or looking outside the company for better processes, better technologies, and, again, weaving that into our overall agenda for our long run.

And we’re encouraged by that. We have a major initiative that we’re rolling out this year in our obstetrics unit, and we’re excited about the possibilities around that. On our clinical systems, we are actually in our alpha pilot on our clinical system upgrades. We will have a beta pilot later this year.

This is a system that we will be able to push more information, standardized information into the cloud and start to turn that into actionable insights that, we believe, can help our patient outcomes. So we’re really excited about our long-run agenda.

And again, it’s geared toward better patient care, but capitalizing on the opportunities inside the walls of HCA..

Our next question comes from Pito Chickering with Deutsche Bank..

Good morning, guys. Thanks for taking my questions. Focusing on the fourth quarter, you talked about 2% lower emissions via the transfers. Were those all surgeries? I’m just trying to understand why in-patient surgeries are so weak on easy comps, and why I didn’t see a bigger increase in outpatient surgeries.

We’ve seen some med-tech companies report very strong U.S. surgical growth. So just trying to understand the delta? And also what are you seeing you grow in-patient surgeries and out-patient surgeries in 2023? Thanks so much..

So Peter, this is Bill. I think our surgical volume, the most – the thing being pushed out was we had 1 less business day, 1 less surgical day, and so that could account for 1.5 points or 2 of that trend.

And I don’t think there is any other trends that we observed in our out-patient or in-patient surgery or call out other than just 1 less operating day. Going forward, I would say that we would anticipate our surgical volume to reflect our longer term trends, which has historically been somewhere around that 2 point growth.

And again, there is some variables that fluctuate on that, but that was the issue on the flat surgical volume for Q4, was nothing other than 1 less surgical day..

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

Great. Thanks. I appreciate you guys breaking out kind of how you thought about the core pricing in the quarter.

Is there a way to do that in the 2023 guidance? Obviously, the COVID is a headwind 340B is a headwind, and then how to think about anything else that’s a moving piece there? I just want to understand the core trends in pricing, and then maybe talk a little bit about commercial rate growth of what you’re renegotiating today? Thanks..

Yes, Kevin, let me start with that. So as I said in my prepared remarks, we are anticipating revenue per equivalent admission around 2%. That’s on an as-reported basis. Obviously, I called out some of those non-recurring revenue items we’ve had the benefit of in ‘22, we don’t expect to continue next year.

If you adjust for those, that’d probably be pushing us towards closer to 3% number, which would be, historically, we would see 2% to 3% growth. So what really moves us back into our historical pricing trends, what we would see pre-COVID is just that we are having to jump over some of that loss of cohort.

So that was a 2% guidance on a revenue per equivalent admission. If you adjust that, it’d be closer to 3%, which is in line with our long-term guidance. That’s contemplating both our Medicare rate updates with some improved commercial pricing that I think we’ve talked about in the past..

Our next question comes from Ann Hynes with Mizuho Securities..

Hi, good morning. I know some of your peers have noted that physician outsourcing services especially on the ER is a pressure point for 2023. Are you seeing that? And if so, how much of a headwind is it to EBITDA? And secondly, just on the merchant turnover, I know you said that while you had a big improvement, you’re still not where you want to be.

Can you talk about where you were for nursing turnover pre pandemic, where you ended Q4, and maybe where you think you could end 2023? Thanks..

Excuse me. So Ann, it’s Sam. We, pre pandemic, were somewhere around 13% or 14% – excuse me, 14% for nursing turnover. We’re on a run rate now 18%, 18.5%. That’s down from mid-20s. We think the industry average is somewhere in the mid to upper 20s right now from what we’ve seen external benchmarks and so forth.

So we’re really encouraged by the progress our teams have made. And again, over the last 6 months of the year, we were starting to see improving trends. We believe we have the right initiatives in place to carry some momentum in that area into 2023.

The market, as I mentioned, is a bit tenuous still, but we’re encouraged by the investments we’ve made in our recruiting, the investments we’ve made in retention and leadership training and just the – I’ll call it, the hand-to-hand combat that exists in making sure that our employees have the resources on their units that are necessary for them to deliver great care to their patients and for them to be successful in whatever their role is in the company.

And we think we’re making progress on pretty much all of those fronts..

And Ann, on the emergency room, I’ve brought it to more than emergency from just hospital-based physician we have talked about in the past. We are seeing some increased pressures for subsidies around our interest room and anesthesiologists and the like. We have a number of initiatives to try to counter those.

But yes, we are expecting some upward pressure in those areas that we factored into our guidance. If it rolls through, as I mentioned in the previous question, in our other operating expenses, then we could potentially see higher single-digit year-over-year growth in those categories, probably at a little bit of pace above our revenue.

But we think we’ve made appropriate consideration for those trends inside of our guidance..

Alright. Thanks..

Yes..

Our next question comes from Brian Tanquilut with Jefferies..

Hey, good morning, guys. I guess, Sam, follow-up to Ann’s question and to Bill’s answer of that. I saw that you exercise the call option and the Envision JV last week.

So just curious how you’re thinking about operationalizing that and what would change for HCA as you bring those physicians back in-house? And maybe just thoughts on the P&L and balance sheet impact of that as well? Thanks..

So we’ve had a wonderful relationship with Envision over the years, and it continues to be strong across different facilities in our company.

A number of years ago, we had made an investment in a co-venture with them that we felt was an opportunity for us to integrate that physician service, mainly in the ER and hospitalist medicine and a few other subspecialty categories within our hospitals as more clinically aligned and so forth. And what we see is an opportunity to further that.

And so we are moving to acquire a larger percentage of that co-venture, and we think it will give us a little better visibility in how to achieve better clinical integration to improve quality. We think we can use that platform to improve efficiency within our emergency rooms primarily and even on our med surge floors where our hospitalists work.

It will support graduate medical education in some innovative ways, we believe. And then, finally, we think it offers up an opportunity for us to advance our connections to our strategic outreach partners in ways that maybe we don’t necessarily accomplish in the structure we have today. So we are pushing through the final stages of that transaction.

I think it’s scheduled to close sometime in the spring. We will take the rest of the year to fully assimilate it, so to speak. And then as we get into 2024, we anticipate being able to execute more effectively on these categories..

Our next question comes from Stephen Baxter with Wells Fargo..

Hi, good morning. Just wanted to ask a follow-up on the 2023 guidance, I was hoping you could talk a little bit more specifically about your expectations on inpatient admissions.

I guess, first, how are you thinking about where the COVID figure goes in 2023 compared to the 5.2% of admissions in 2022? Any implication being I’d love to hear how you’re thinking about non-COVID admission growth in 2023? Thank you..

Yes. So I’ll start with that. So we expect a continued decline of COVID admission as you’ve mentioned, and I said in my prepared remarks, they represent about 5.2% of our total admissions. This year, we’re thinking next year, probably somewhere between 3% and 4% of our total admissions.

We believe right now, our inpatient admission growth somewhere around that 2% number, and that’s embedded within the equivalent admission guidance that I gave between 2% to 3%. And again, we will continue to monitor that as we go through the year.

We continue to believe that there is strong demand in our markets, and we’re positioned well to serve that demand. So inpatient volume, we’re thinking hovering around 2%, and then outpatient revenue probably continue to grow in that mid-single-digit level. And that helps us get to the 2% to 3% equivalent admissions that’s – that our guidance entails..

Our next question comes from Scott Fidel with Stephens..

Hi, thanks. Good morning. Interested if you can just recap for us what the non-COVID acuity and case mix trends were in 2022. And then what you’re building in for your assumptions for 2023? Thanks..

Yes. So I don’t know if I have the case mix necessarily. We’ve seen relatively flat, as I recall, on the COVID case mix, right? Our non-COVID mix improved about 2% sequentially from the third quarter to the fourth quarter going forward. Our revenue per equivalent admission was roughly flat for the year-over-year comparisons..

And then, Bill, on the outlook for ‘23..

For non-COVID?.

Yes..

Yes, that would be embedded in our revenue per equivalent admission of about 2%. And then when you factor out the loss of the revenue items, I think, as I mentioned earlier, that pushes us closer to 3%. And that would be just a combination of all factors of acuity as well as payer mix and pricing trends underneath the....

And Bill if I can add, I think it’s important for everybody to understand it. Strategically, we continue to invest in programs, as I mentioned in my prepared comments. A lot of those programs are farther up the acuity ladder, if you will. They are more significant programs.

They are extensions of existing programs and as we get our footing, so to speak, with a mid-level program or an upper-mid level program, then we can move into a more acute level program. And that helps with our overall acuity statistic. So, that part of our strategy, we are doing that on top of the same fixed cost platform.

So, our hospitals have the same fixed cost regardless of the acuity in many instances. And so if we can increase the acuity, we get operating leverage from that. So, strategically, that’s a very important initiative of ours. The transfers and that we haven’t been able to take care of tends to be slightly more acute than our average in most instances.

And here, again, that’s why it’s so important for us to get more employees across the organization to take care of these patients who need our services. But all of that’s embedded inside of a real strategic initiative that we have..

Our next question comes from Calvin Sternick with JPMorgan..

Hi. Good morning. It looks like another strong quarter for ER volumes.

Can you talk a bit about the trends you have seen there in the last few quarters in terms of payer acuity mix, and what you are expecting for sort of full year? And as you think about the volume trends across the business over the last couple of quarters, are there any service lines or categories that have over or underperformed relative to your expectations? And any color you can give on those going into 2023? Thanks..

This is Sam. Let me speak to some of our service lines trends. During the pandemic, we felt the emergency room might be disrupted from what our previous beliefs were. And there was new uses of telemedicine alternatives that were being experienced, we thought. What we have seen is just the opposite.

The resiliency of the emergency room for communities is even greater than we thought. And the demand there is very strong because our emergency rooms and other people’s emergency rooms are a solution set for people whenever healthcare is needed. So, our trends in the emergency room have been very solid over the course of the year.

And when you look at them really without the COVID activity, it’s especially impressive I think. We have seen good volume growth in our orthopedics. Our total joint business for the quarter was up 6%.

In many instances, we fully absorbed, we believe, most of the shift over the last 3 years during the pandemic, with the orthopedic business moving from inpatient to outpatient. And in most instances, we believe the large majority of that is behind us. And so we don’t have that as a pressure point like we have had over the past 3 years.

But nonetheless, we have grown that business in the face of the site of care shift. We have a very robust pipeline for our emergency rooms, especially our freestanding emergency room platform, a very significant development opportunity there for us across our communities, and we are investing in that. Our urgent care center platform continues to grow.

We are up to 260 urgent care centers. We will probably push through 300 in 2023. Our ambulatory surgery center platform continues to grow. Here, again, we have more de novo development inside of our ambulatory surgery center platform than we have had in the past, and we are encouraged by how that fits into our networks in a very productive way.

So, we are really pretty excited about our investments in our ambulatory network, our investments in our acuity programs and our higher service lines. And we will continue to – we believe, be well positioned to deal with the growing demand that we see in the market..

Our next question comes from Lance Wilkes with Bernstein..

Yes. Could you just talk a little bit about permanent nurses and understand the retention rates are getting better there.

Can you talk a little bit about new hirings, what sort of growth you are seeing there? What are maybe some of the drivers of access to nurses there, where are they coming from? And then also, if you could just talk a little bit about, you said the investment spend was pressuring and the long-term plan was pressuring ‘22 a little bit.

Can you talk a little bit about how ‘23 might look compared to ‘22 with that? Thanks..

Why don’t you take, Bill, the last question?.

Yes. This is Bill. On the investments, when you think about the technology investments, the investments we are making in some of the clinical transformation. And I would also say, with the expansion of our nursing schools going forward, probably is somewhere around an incremental investment of $150 million in ‘23 compared to what we ran in ‘22.

Lance, we didn’t call that out, but it’s part of a long-term investment we think, that will continue to drive performance and value for us..

So, our hiring in 2022 was up a little north of 6%, just a huge number of new hires. And so that’s the total number just as a starting point. Where that is coming from, that’s coming from new grads. There still is a decent pipeline of new graduate nurses in our communities.

We have academic partnerships with different colleges beyond Galen that are important to that pipeline. We are also seeing some travelers decide that, okay, enough, we traveled, we want to come back, and we have been able to recover some of the employees who traveled for a period of time back into our organization.

So, we continue to be focused on trying to recover them.

And I think again, with our benefits and with our wage adjustments and all the investments we are making in clinical education and other components of our labor agenda, we are starting to see more favorable trends in our recruitment function that we think, if they carry into 2023 and through the year, should be positive for us..

Thanks..

Our next question comes from Jason Cassorla with Citigroup..

Great. Thanks for taking the question. I just wanted to ask a bit more on your capital priorities. You have recently divested ownership in some hospitals.

But just wondering how you are viewing the M&A backdrop and if you are seeing opportunities to increase your footprint in your current markets or potentially entering into new markets? And then just on share repurchases, you have increased your authorization by $3 billion, you have $4.5 billion rough remaining.

It’s just in light of the $7 billion this year. Just curious how you are thinking about share repurchases in the context of your larger capital deployment priorities? Thanks..

Yes, let me take that. This is Bill. Let me take the latter one first. I think share repurchases, you spend an important part of our overall balanced capital allocation. As you mentioned, we did $7 billion in ‘22. We will have authorization close to $4.5 billion.

I think we would plan on completing the majority of it sometime in this calendar year with a little bit of roll forward afterwards. And again, we will continue to adjust as kind of market conditions present, but a share repurchase program has just been part of our overall balanced allocation of capital going forward..

For M&A, we have been fairly active in the market with outpatient acquisitions again when they come available, whether it’s urgent care, some freestanding emergency room, some ASC, some physician clinics and so forth. And those are very complementary, synergistic to our network acquisitions, and we will continue to pursue those as they develop.

We have not had too many opportunities on hospital acquisitions. Although, recently there was an announced LOI on a hospital just outside of the Dallas-Fort Worth market that we think is synergistic with respect to clinical services and so forth with our system in Dallas-Fort Worth. So, we will continue to look for those.

We do have a pipeline of Greenfield hospitals because the acquisition environment is not as robust end market as maybe we would have hoped. So, we need to consider Greenfield projects, and we do have a number of those that are in the works. We have one under construction currently in San Antonio.

And I want to say we have seven or eight parcels of land, maybe 10, that are designed for future hospital development when the time is right for us to make those investments..

Our next question comes from Steven Valiquette with Barclays..

Thanks. Good morning everybody. So, just on the surgical volumes, you addressed most of the key questions related to the volumes for both the fourth quarter and the full year ‘23. But just a follow-up on that topic to get, I guess a little bit more.

I was just curious whether or not you do see any notable pent-up demand for any surgical cases exiting out of 4Q ‘22 that might be falling at least into the early part of ‘23 for various reasons, just curious any visibility on early ‘23 at this stage? Thanks..

It’s hard for us to really judge the – whether there is demand on the sidelines, and we don’t see it. I mean we get some anecdotal information from our physicians who might indicate that, okay, their clinic patient profiles were better in the fourth quarter than they were at any point in time in 2022.

I don’t know if that’s a precursor or not for pent-up elective surgical demand. I think we are just going to have to wait and see. But I believe it’s a positive metric and a positive anecdote that their clinic roles, patient roles appear to be at a higher level than they were in previous parts of 2022..

Okay, great. Thanks..

Our next question comes from Jamie Perse with Goldman Sachs..

Thank you. Good morning.

Just a follow-up on the commercial reimbursement dynamics, first, can you remind us what percent of contracts have been recently negotiated that will take us back at the higher rate January 1st? And then secondly, can you give us a little bit of color on what the initial bump in those contracts looks like relative to the rate escalators that are locked in place for the next couple of years? Thank you..

We have, I want to say, Bill, maybe 70% of our contracts for 2024 contracted. I will tell you that most of the contracts, if not all of the contracts we closed in the last three quarters of ‘22 were in line with our expectations, which was around mid-single digit inflators.

So, those have to work their way into the ‘23 portfolio of contracts and on into the 2024. So, we are encouraged by the outcomes of those negotiations. I think there is a general recognition in the payer community that the input costs for providers is up, or up.

And so given those inflationary pressures, they recognize that there is a sensitivity to respond to that. And we are trying to be appropriate in our app. And I think that’s been received well, and we have been able to close these contracts reasonably timely.

So, we still have 30% or so of 2023 that will get negotiated over the first part of this year, and will carry us through all of ‘23 and into ‘24. We are about 40% contracted on ‘24. Again, the tail effect of some of the closed contract negotiations that we have just achieved will carry into 2024..

Our next question comes from Joshua Raskin with Nephron Research..

Hi. Thanks for taking the questions. I know CapEx guidance for 2023 is only down slightly, and I know it’s still January, but it would be the first time in a long, long time, the CapEx would be down year-over-year, not counting 2020.

I was wondering if you could just speak to any changes in budgeting or strategy or if there is anything that could be tempering that investment?.

Yes. Josh, I don’t think there is anything tempering in the investment at all. I think 4.3% is our expectation. As I mentioned in my comments, we initially expected 4.2%. For ‘22, it came in a little higher because we had some year-end activity that I mentioned around some real estate and some IT.

So, I wouldn’t read anything from down to the fourth quarter 4.3%. It’s actually up compared to where our initial expectations are. But as a summary, we still see very good opportunities to deploy capital, we believe, to capture growth opportunities in the marketplace.

And we have talked about some of that, whether that would be through our freestanding EDs, whether there is some development of new hospitals, whether it would be expansion of campuses. So, again, I think it’s an important part of our overall capital allocation and I think an important part of our continued long-term focus on growing..

Our next question comes from Andrew Mok with UBS..

Hi. Good morning. I was hoping you could provide a bit more color on the supply cost trends into 2023. What are the assumptions around unit cost increases versus – what steps did you take to manage inflationary pressure for multiyear contracts? Thanks..

Well, thank you for the question. Our teams and our supply chain teams have done an incredible job over the past 12 months to 18 months on our supply cost portfolio, and especially with the backdrop of inflationary increases.

And we have talked about through the year, we have been really seeing really positive trends in and actually to keep our supply cost growth below our revenue growth. Much of that was because some of our contracts, 60% of our contracts or so was under firm pricing for the most of ‘22.

As we look forward, I think our basic assumption is to continue to keep our supply cost as a percent of revenue flat from where we ran full year ‘23. That would imply our supply cost per unit is somewhere around that 2% level, plus or minus a little bit. But again, we are expecting continued good results in that.

And again, our team is doing a nice job. We can keep that supply cost as a percent of revenue flat with where we ran this year, with the backdrop of inflationary that’s pretty positive. We have a number of initiatives underway that our teams use.

Part of our benchmarking initiatives is to look at utilization and identify best practices across the organization. We also are looking at product selection, partnering with our clinical teams.

So, we have a number of initiatives underneath our supply chain operations that are helping us to achieve those results, and we look forward to those continuing as we go into ‘23..

Our final question comes from John Ransom with Raymond James..

Yes. Hard it is to be clever with the question after all these good questions. I believe three in my question here and have five minutes.

So, for me, if we think about, as you reduce your labor turnover, so let’s say it goes hypothetically from 25 to 20, how does that – how would that affect your labor cost per – either for revenue or per unit? How does that factor into the savings algorithm for us to think about?.

How it affects our revenue per unit?.

Well. No.

I mean salary either salary as a percent of adjusted admits or salary as a percent of revenue, how does reducing turnover? If you reduce turnover about say, 500 bps, how would that affect the labor margin?.

Well, in theory, will flow through as reduction of our contract labor. And so the margin, if you will, on the contract labor as we replace an individual from a contractor to an employed one is that we will save that margin.

And being able to reinvest and what we have been able to do this year is reinvest back into our employee workforce and that’s part of that turnover level. And I think all of that, John, I would say, is incorporated, if you look at the overall labor spend. So, I mean there is a lot of components into that.

And as we said, we think we can maintain our labor cost as a percent of revenue where we are finished this year. It’s a function of reducing those premium labor and reinvesting back into our employee workforce and keeping that relatively flat year-over-year.

And I think that’s a good result for us and allows us to continue to recognize the important work our employees do for us..

Thanks a lot..

Thanks John..

There are no further questions at this time. I will now turn the call over back to Mr. Frank Morgan..

Devin, thank you for your help today and thanks to everyone for joining us on this call. We hope you have a great weekend. I am around this afternoon, if I can answer additional questions you might have. Have a great day..

That concludes today’s conference. Thank you for attending today’s presentation. You may now disconnect..