HCA Healthcare, Inc. (HCA) Earnings Call Transcript & Summary

Welcome to the HCA Healthcare Third Quarter 2026 Earnings Conference Call. Today's call is being recorded. [Operator Instructions] 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. Frank. Please go ahead, sir.

Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and our CFO, Mike Marks. Sam and Mike will provide some prepared remarks, and then we'll take your questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. 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'll now turn the call over to Sam.

Good morning, and thank you for joining the call. The company's results in the third quarter reflected improvement in key areas of our business. First, demand for our services continued to grow at a solid rate. Adjusted admissions on a same facility basis grew 3% compared to 2.3% year-to-date. Inside this growth, insured volumes grew faster in the quarter than in the first half of the year. The third quarter reflected the 22nd consecutive quarter of volume growth for the company. Second, revenue for adjusted admission for our Insured business, excluding Supplemental Payments increased at a higher rate than in the first half of the year. This increase partially offset the payer mix pressure from continued volume decline for patients who were formerly covered in health insurance exchanges and are now uninsured. Additionally, we had a modest incremental net benefit of $50 million in the quarter from Medicaid Supplemental Payment Programs, primarily related to our recently approved Virginia program. These factors, coupled with improved cost results contributed to solid financial performance in the quarter that slightly exceeded our expectations. Diluted earnings per share as adjusted increased almost 4%. I've often mentioned that HCA has strong staying power because of our scale, the important role we play in providing critical services to communities and our disciplined culture. Despite the challenges this year brought about by federal policy changes, we have continued to move the company forward and believe we are positioned to end the year positively. As we look ahead to 2027, let me share a few preliminary observations around certain aspects of our business before we provide our full year guidance in January. I'll remind everyone, we are still early in our planning process, and there are several important areas that remain fluid, including the policy environment. First, we expect demand for Services to remain strong with volume growth forecasted to be 2% to 3%. This range is consistent with our long-term thinking. Within the demand environment, we believe it's reasonable to assume for 2027 that fewer people will lose their coverage on on the health insurance exchanges than we experienced in 2026. However, we do expect that there still will be a meaningful impact on payer mix. We need to get through the fourth quarter before we can provide more details. Next, we expect to receive approximately $550 million to $650 million less in Medicaid Supplemental Payment net benefits due to various state programs that received grandfather approvals in 2026 and reimbursed us for services we provided in prior years. Last, we anticipate favorable cost performance primarily due to our ongoing enterprise-wide Resiliency Program and the operating leverage from the expected volume growth. When we aggregate these preliminary observations, we anticipate our earnings in 2027 will be generally consistent with 2026. Beyond 2027, we anticipate performance more in line with our long-term growth targets. This view makes three important assumptions. First, we moved past the most significant effects on payer mix from the exchanges. Second, we assume no material policy changes beyond H.R. 1, and finally, we have a set of strategic initiatives, including digital transformation, network development and ongoing resiliency programs that generate significant value. I'll reiterate, it is still early, but we believe these preliminary perspectives provide context for how we currently see the company's growth prospects. Let me close with this. Our colleagues continue to provide high-quality care to our patients and execute our strategic plans. I appreciate their efforts in delivering on our mission, and I want to thank them for their good work. As we get further into the execution of our plan, we believe it will enhance access for our patients with our capital spending, create a better work environment for our caregivers with our AI transformation initiatives and deliver value for our shareholders with our enterprise-wide resiliency program and balanced capital allocation. As we look to the future, I'm confident that HCA Healthcare has the right people, the right process and the financial position to achieve our long-term objectives. With that, I'll turn the call over to Mike for more details on the quarter.

Thank you, Sam, and good morning, everyone. As Sam noted, demand for our Services continued to grow at a solid rate. Compared to the prior year quarter on a same facility basis, admissions increased 2.7%, equivalent admissions increased 3% and ER visits increased 5.1%. Inpatient surgeries were down 1.4%, outpatient surgeries were down 3.7%. Regarding Surgical volumes. Consistent with the second quarter, we continue to see solid growth in our [ emerging ] surgical volumes and pressure [indiscernible]. Same-facility equivalent admissions in our Insured population excluding exchanges, increased approximately 3% in the third quarter versus prior year. Exchange equivalent admissions declined approximately 19% versus prior year quarter. For context, the third quarter of 2025 with our high watermark for exchange volume, making for a difficult comparison. However, we did see sequential improvement in exchange volume from 2Q to 3Q of 2026 of approximately 8%. Like the second quarter, we continue to see patients who have lost coverage on the exchanges, migrating almost 1:1 into uninsured. This 1:1 migration makes up approximately 80% of our Uninsured volume growth, with the remaining 20% primarily related to decrease in Medicaid conversions and mostly in Texas. Our Uninsured volume in third quarter '26 represented approximately 10.5% of total equivalent admissions versus 8.5% in the prior year quarter. We estimate the payer mix shift from exchanges to uninsured resulted in an unfavorable impact on adjusted EBITDA of approximately $400 million in the quarter. We now expect the full year unfavorable impact on adjusted EBITDA from payer mix shifts to be at or slightly above the upper end of the range of our previously updated estimates. For Medicaid Supplemental Payment Programs, the company recognized approximately $50 million of incremental net benefit during the third quarter. We now expect an incremental net benefit from Medicaid Supplemental Payment Programs to be between $600 million and $800 million for the full year 2026. This increase in our estimated range was driven equally by the grandfathered application from Virginia and onetime payments from across our other programs. We were pleased with our cost results in the quarter. Same facility cost per equivalent admission when excluding Medicaid Supplemental Payment Programs was essentially flat versus prior year quarter, and it improved 40 basis points sequentially. As we typically see an increase sequentially from second quarter to third quarter, this outcome reflects strong operating discipline from our teams. Moving to capital allocation and cash flow. Capital expenditures totaled approximately $1.36 billion in the quarter. Additionally, we purchased approximately $3 billion of our outstanding shares, and we paid $165 million in dividends for the quarter. Cash flow from operations was approximately $4.5 billion in the quarter. Our debt-to-adjusted EBITDA leverage remains in the lower half of our stated target range, and we believe our balance sheet remains strong and well positioned for the future. We currently expect to complete most of the existing authorized share repurchase program by year-end, subject to market conditions and other factors. As noted in our release, we have reaffirmed our estimated guidance ranges through 2026. Given our third quarter performance, we currently expect to be in the upper half of our guidance ranges for the year. I will now hand the call back to Frank Morgan for questions.

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

[Operator Instructions] Your first question comes from the line of A.J. Rice with UBS.

Hi, everybody. Maybe just to -- I know it's early to be given a lot of comments about 2027. But and you're thinking about consistent EBITDA versus this year. It sounds like you're thinking there is a fairly substantial incremental, call the exchange headwind that you've got to overcome and you're also talking about incremental savings from ongoing resiliency programs. So I wonder if there's any way to flesh out sort of an order of magnitude of what you think that incremental public exchange headwind might be next year or even if it's a wide range. And similarly so should we look for cost savings similar to the $400 million Resiliency Program you announced this year, next year?

Well, A.J., I think we'll try to do in preparing our [indiscernible] comments, to view the best information we have at this point. That Sam [indiscernible] in his prepared comments, we still are in the early stages of our planning cycle. And as we kind of finish fourth quarter, we're really studying [indiscernible] components. Number one is our results in fourth quarter and how the strength of our core performance continues to mature. I think it's clear in third quarter, we were pleased with our core growth. And we feel like we have momentum. We need to validate that in fourth quarter, and that will give us a really good sense of our core growth as we kind of step into 2027. The second thing that we've got to study is the exchange environment. And as we go through the fourth quarter into first, we'll have better information about how our exchange volumes perform here in the last quarter of the year. But we'll also have better intelligence about enrollment. The enrollment period starts on November 1, and it goes through mid-January. And so with those two things, we'll be in a much better position to give you our best sense of this on our January call, our fourth quarter call for '27 guidance. But I think as you think about core growth, you think about the headwinds that we have disclosed related to Medicaid Supplemental Payment Programs. And then what ends up happening with the exchanges in '27. Those are the big moving parts, and we'll give you further guidance as we get on our fourth quarter call.

A.J., let me add to the cost. I mean, we see our resiliency agenda broadly as an ongoing strategic program for the company. We now have new capabilities. We have new technology. We're expanding our Shared Service platform as a result of that. And we're able to move the cost agenda systematically as a company today. And heretofore, we didn't have that ability because we didn't have the capabilities nor the technology. And I think the mindset to accomplish it as a result of that. So when we start thinking about costs in '27, as I mentioned in my my comments, we do anticipate more value coming from our Resiliency Program broadly within our networks, and from a cost standpoint, overall for the company. And so that is more of a strategic agenda item that will carry itself into the future and be a part of our programmatic efforts as we move beyond 2027, I think the other point, Mike, is the Medicaid Supplemental Payment Programs related to some payments from prior year as we think about '27 also.

Our next question comes from the line of Ann Hynes with Mizuno.

I just want to ask about 340B. I know there is a regulation out there that if it goes into effect as is, should benefit the for-profits that don't participate in that program. And I know that it will probably be challenged at some point to the legal system. But does that flat guidance assume any change in that program or any potential benefit? And if it does, have you sized that?

Thanks, Ann. So this is part of the Medicare Opts rule that's proposed at this point. We were pleased with the construct that is a part of the proposed rule as it relates to a budget neutral reallocation of 340B. It would benefit us. We have not -- we're not sizing that publicly at this point. And as we think about kind of our early look [indiscernible], just keep in mind the idea of being generally consistent is where we are standing here in third quarter, we'll give you much more detail on the information as we get on our fourth quarter call. I would say, I mean, we view the Opts rule as proposed and we're hoping that it gets finalized here saying is a positive factor for ACA as we head into '27.

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

I appreciate the demand comments for next year and the expectation for 2% to 3% volume growth. I'm wondering how the surgical backdrop is fitting into your thoughts there? I know you had said that you didn't expect recovery of the kind of weaker elective trend through the end of this year. But as we think about next year, is there pending demand getting pinned up there that could unwind? And would that be upside to that 2% to 3%? Or would that be considered in there? Any thoughts on how you're thinking about surgical progression for next year?

Ben, we haven't landed on components of that growth just yet. We have some viewpoints, I think, again, we need to get through the fourth quarter, see how the seasonality on surgery plays out in the fourth quarter. I think our Emergent business, as Mike spoke to, continues to be strong. We see some macro forces impacting the elective business, coverage being the primary macro force and then just sort of general affordability across the the economy being a second one. So I think from that standpoint, we haven't landed on any surgical viewpoints. But I think it's important for everyone to understand that our composition of volume is it's fairly diverse. I mean we have cardiac, we have women's, we have NICU. We have transplant programs. We have surgery, yes, medicine, critical care, all of these components are attributes of our company that we think give us an ability to navigate through a component not being as productive as we want. And that's -- what we're seeing, we're seeing more growth in other services that are compensating for some of the surgical growth or surgical declines that we're experiencing. For example, our neonatal activity in the quarter was very strong. Our cardiac business continues to be strong. Our trauma business strong, EMS traffic to our hospitals, up significantly. So there's all of these elements that go into our volume assumption, we're not ready to sit there and call out Surgery specifically for 2027 until we get a better viewpoint of it through the seasonality patterns that typically exist in the fourth quarter.

Your next question comes from the line of Brian Tanquilut with Jefferies.

Maybe, Mike, as I look at the SWB as the operating expense lines. SWB up -- sequentially up, other OpEx down. Anything you can call out there, especially as we think through temp staffing, we're seeing indicators that it looks like [indiscernible] orders are picking up. So just curious what you can share with us on those two line items, especially given resiliency efforts?

Sure. And I mean that's part of this answer is consistent with our sequential notes that we had in my prepared comments, Brian. Typically, when we go from second quarter to third quarter, that is the timing of when we do a lot of our merit adjustments in labor. And so we typically see even a 100 basis point increase in our expense per AA overall, and that's one of the factors. And so we were actually really pleased when we looked at our extensive per equivalent admissions, obviously, excluding state supplemental payments, One, they were essentially flat to prior year. But two, they were 40 basis points sequentially down from second quarter to third quarter, which we think really reflects the strength of not only our resiliency plan but also the operating leverage we're getting from state Supplemental Payment Programs. I mean if you look at SWB on a margin basis to prior year, even with the softer overall revenue, we had a 40 basis point margin improvement. So we were we were pleased with that. And the same thing, we had good performance in supplies as well. On other operating expenses, if you just look at third quarter [ and ] the prior year, you do have a bit of cost related to the state supplemental payments. Keep that in mind. Professional fees continue to be a pressure point for the company. We were up about 12% versus prior year quarter, and professional fees now represent about [ 24% ] of other operating expenses. And I would note that those continue to be driven by radiology and anesthesiology. So that's -- Brian, that's a bit of a rundown on the cost side.

Your next question comes from the line of Pito Chickering with Deutsche Bank.

I'm going to ask A.J's question a little differently. You quantified the $600 million or $550 million to $650 million and less [indiscernible] loan payments. Can you talk qualitatively about mix in Medicaid impact next year and the core admission growth of 2% to 3%. Can you just confirm that 2027 adjusted core EBITDA growth is still in the 4% to 6% range the other pieces impacting that? Or is core running hotter or lower? And how much is resiliency driving that core growth?

Well, resiliency is just part of our core operations. And so that's the way we think about resiliency is part of the work we do every day and manage the company. When I think about core growth in third quarter, we were pleased with the core growth in the third quarter and call it a 10% core growth increase. I think that reflects good volume growth. It reflected a good net revenue per unit improvement in the quarter and really good cost management as well. And I think as you see how we kind of set the guidance range in the upper half of the range, that gives you an implication of how we're thinking about fourth quarter. And then we'll give you kind of our thinking in more detail about 2027 when we get on our fourth quarter call. So that would be the way to think about core growth, we'll have to validate it for fourth quarter, but we were really pleased with third quarter. And you get the sense from the upper half of the range [indiscernible] that we have confidence going forward.

Your next question comes from the line of Matthew Gillmor with KeyBanc.

On the pricing topic, you called out an acceleration in insured revenue per equivalent admission. It sounded like that was better than expected. Can you talk about some of the drivers of that acceleration?

Sure. So Matthew, if I look at kind of net revenue per unit, and I think about the insured book, obviously, excluding exchanges because the payer base is still the big negative that we're dealing with in terms of net revenue per unit to prior year. Number one is really the strength of our commercial volume. Our commercial, excluding exchanges volume was up 2.7% over prior year quarter, and that's strong. And so that's a component of our payer mix, is definitely a part of why our net revenue per unit was a bit stronger in the third quarter than the first half of the year. The second, we continue to see solid rate growth across our [indiscernible] of payer categories. And then really third, Parallon, we see continued strengthening in their abilities to collect our net revenues and yield our contracts. Their work to continue to strengthen our abilities to deal with the [indiscernible] payments continues to improve. And so I think overall, we had a good net revenue per unit performance in the third quarter, especially kind of given the headwinds from our payer mix impact.

Your next question comes from the line of Sam (sic) [ Sean ] Dodge with BMO Capital Markets.

Maybe just on the 2026 guidance. Mike, you said you're not pointing to the upper half of the range. I think that still implies core growth in Q4 will accelerate some from Q3. Maybe if you could just walk us through the visibility you have and what's going to drive that? Is that just incremental gains from resiliency you're expecting to come through? And then Sam, you also mentioned volume growth in Q3 broadly improved from the first half of the year. Is that part of the assumption today that volumes also continue to improve into Q4?

Well, first, I would say, I mean, I think if you look at the upper half of our guidance ranges, that largely implies our core growth fairly consistent in the fourth quarter and third quarter, would be the first thing out of context. And then I think the drivers are similar. Number one is we did see strength in volume in third quarter. And so that's encouraging for sure. We've already mentioned a little bit on the net revenue per unit side. There tends to be a step-up from third quarter to fourth quarter in normal course. And so we expect that normal seasonal trend to apply broadly. And then we do believe, as even Sam mentioned, not only in his opening but, as we were talking about in the first question, that our performance around our resiliency plan, our ability to manage costs, we continue to see strength, across our resiliency plan in third quarter and fourth quarter and into '27, '28 and beyond. So I think those are the key components Sean, that are kind of making up our guidance comment for fourth quarter of 2026.

Your next question comes from the line of Whit Mayo with Leerink.

Did the HICS headwind get larger in any particular market? And any comments around AR collectability, balance after collectibility would be helpful. And any of the $400 million, is that related to prior quarters?

Well, I would say, with that our HICS results in third quarter were a little bit higher than we estimated. We would have estimated [indiscernible] based on our guidance that we gave in the second quarter, the third quarter would be 15%, 16% decline. We ended up at about 19% decline, which just reflects the sustained decline in the -- in our exchange volumes. I'd like to put that context though. I mean that 2 points or 3 points is about 2,000 adjusted admissions. Just -- we have about 1 million adjusted admissions in the quarter. So these aren't perfect estimates, but it gives you a sense of kind of the numbers we're looking at here. Our experience in third quarter, and I mentioned this in my prepared comments, number one, third quarter of last year was our high watermark. So there was a bit of a prior year comparison difficulty. We did see, however, a sequential improvement in exchange volume from second quarter to third quarter '26 of about [ 8% ]. And so all of that when we bought it together is kind of what guided us to say that we think for full year '26 now, we'll be at to maybe slightly above the top end of our previously updated ranges for the exchanges. That's kind of how the numbers pulled through here in the third quarter with.

Your next question comes from the line of Ryan Langston with TD Cowen.

I appreciate the commentary on elective versus emergency surgical future trend growth. Can you maybe update us on what ASC versus HOPD surgical volume look like in the third quarter?

So the ASC surgery volumes were down 5.4% on Surgery. Overall case volumes were down about 3.7%. The primary pressure is related to the exchanges in our ASC book, very similar to the hospital side. I would note, however, that even in light of the volume softness there that our overall net revenue and earnings did show some growth to prior year. The hospital-based outpatient surgeries were down 2.9%.

I think it's important to understand the construct of our ASC platform. And that informs at some level for us, the macro forces that are out there with elective care at this particular juncture. And so when you sort through what's going on, yes, there are certain issues in some centers that we have, but at sort of an aggregated level, it informs a little bit of our macro thinking around some of those forces that are influencing overall demand.

Your next question comes from the line of Sarah James Cantor Fitzgerald.