HCA Healthcare, Inc.

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'll 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, 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.

All right, good morning and thank you for joining the call. We finished 2022 as expected with pre-pandemic seasonality demand norms driving solid volume growth. Additionally, we continue to see progress with our labor agenda. These factors help produce solid earnings in the fourth quarter that were consistent with our guidance. We are encouraged by this outcome and believe this operational momentum should position us well for 2023. 2022 was a tale of two halves, with the first half being more about winding down from the previous two years of intense COVID activity and responding to the resulting challenges. The second half was more about normalization, which included strong demand and an improving labor market. Once again, I believe our people have demonstrated an impressive capability in the face of these dynamic forces and delivered for our patients, the communities we serve, and other stakeholders. Healthcare people in general are unique, but I believe HCA healthcare people are even more special. I often refer to them as can-do people. And again, this past year, I think they proved it. I want to thank them for their hard work and everything they do each and every day for our company. Same facility volumes across the company were strong in the fourth quarter. Admissions grew 3% year over year. Non-COVID admissions increased in excess of 5%. Equivalent admissions were up 5.4%. with impressive growth of 11% in the emergency room. Most of our other volume categories had solid growth metrics in the quarter also. The payer mix and acuity levels in the quarter remained at favorable levels. These factors produced revenue growth against a difficult comparison of 3% in the quarter. With respect to our people agenda, we were pleased with the improvements we saw in key metrics Turnover numbers for registered nurses were down 26% in the fourth quarter as compared to the previous four quarters average. Our turnover rate is still higher than we want, but we believe it is better than the industry average. Employee engagement scores recovered to around pre-pandemic levels. Again, our engagement is above the industry average. Our recruiting teams continue to generate results for the company. Hiring increased 6% year over year in 2022. And lastly, we opened our seventh Galen College of Nursing school this year. With respect to labor costs during the quarter, we experienced stable labor costs per hour with utilization of contract labor declining. As we have detailed in the past, we have implemented a robust human resources plan. We executed well on it and expect to make further progress as we move into 2023. It remains a top organizational priority. Even with the progress, we continue this quarter to experience capacity constraints, creating situations where we were unable to deliver services in certain situations. Also in the quarter, we saw value from our portfolio optimization plan and closed two joint ventures with strategic partners. One was with our Sarah Cannon Research Institute, which we combined with McKesson's Cancer Research Entity. We believe the combination of these two entities will produce better cancer research and more clinical trials across the country, providing even more community-based resources for physicians and patients to fight this disease. The second co-venture is with our Core Trust Purchasing Organization. We closed on a new partnership with Blackstone. We believe this new relationship can expand our ability to offer commercial purchasing and services solution to a broader variety of customers. We believe both of these deals achieved our strategic objectives and connected us with a better platform for success in the future. We are excited to partner with both entities. We also implemented our capital plan for the year as expected, including redeploying the proceeds from these two new joint ventures. Bill will provide more details in his comments. And finally, we announced in the last quarter a significant leadership transition that we believe will position the organization better with responding timelier to market dynamics while also strengthening the alignment of corporate functions to our strategy. The executives who are part of this transition are all proven HCA executives. They understand and appreciate our culture, and they know how to execute. As we push ahead into 2023 and beyond, we believe the strong demand for healthcare services presents opportunity for HCA Healthcare in an otherwise challenging macro environment. We believe the company is well positioned culturally, competitively, and financially to capitalize. Our agenda next year will be focused on the following three areas. First, overcoming labor and capacity challenges. Again, we believe we have the appropriate initiatives in place to respond to these. Second, counter inflationary pressures. Again, we have numerous efforts in place to contend with these forces while ensuring we continue to deliver high-quality outcomes to our patients. And third, accelerating growth with our winning plays. This agenda continues to leverage capital investments in outpatient facilities, clinical equipment for our physicians, and service line expansion. On top of our 2023 agenda, we are also making investments in our long-term plan, which includes four primary elements. 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 three years have been an extraordinary experience for everyone at HCA Healthcare. There's 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'm even more proud of our people. The future for our company is even brighter because of the past three 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 in 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 emissions increased 2.9% over the prior year. For the full year, our same facility emissions were up 0.5%. Excluding COVID emissions, our same facility emissions 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 we're 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 one 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 three to four times. 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 recognize $244 million of revenues and $90 million of expenses related to the Texas Directed Payment Program that was for the last four months of 2021. This program that started on September 1st of 21 was not approved 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 emissions to grow approximately 2 to 3 percent, and our revenue per equivalent emission to grow approximately 2 percent. 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 facility. 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 56 cents to 60 cents per share. With that, I'll turn the call over to Frank, and we'll open it up for Q&A.

Thank you, Bill. As a reminder, please limit yourself to one question so that we may give as many as possible an opportunity to ask a question. Devin, you may now give instructions to those who would like to ask a question.

At this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. Our first question comes from Justin Lake with Wolf Research.

Thanks. Good morning. Just a couple numbers questions here. I appreciate all the detail you've given. So first, just all thinking about 2023, can you talk to us a little bit about what you're expecting for labor expense? and maybe delineate the cost on permanent labor versus hopefully, you know, the downward trend, maybe give us 22 versus 23 on labor. And then, you know, a 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've assumed there on payer mix and kind of impacts from that on 2023 guide as well. Thanks, guys.

Yeah, Justin, this is Bill. Let me start. So as it relates to labor costs, I think as a percentage of revenue, we'll 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 the payer mix, we think payer mix, For now, we'll 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've contemplated that within the context of our overall range. But we are encouraged with some of the payer mixed streams.

Our next question comes from AJ Rice with Credit Suisse.

Hi, everybody, and thanks for the outlook, commentary, and so forth. Maybe because you've got about a $600 million range on the EBITDA range you're 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 higher low end, or is there expense management open questions in your mind, and specifically on the labor aspect? You've 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've got to redeploy to support permanent labor?

AJ, this is Sam.

I think on the guidance, I mean, we've got 2.5%, I believe, on either side of the midpoint. You know, 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. You know, 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 costs 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 Cowan.

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? Yeah, Gary.

On contract labor, you know, for the quarter, we were down about 16% from where we ran in fourth quarter of last year, so continued good improvement in that area. It represented roughly 7.8% of our total salary, wages, and benefits. We talked about giving that number before. So, again, solid trends in the fourth quarter 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 and 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 flat and pretty consistent throughout the year. As we look forward to 2023, we do believe that's an area that could continue to see some higher single-digit inflationary pressures, and we factor 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 areas around utilities, insurance pro fees are going to continue to see some pressures, and we factored that into our guidance.

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

Hey, 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, have 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 they had 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 headcount 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 into 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, and I think this can 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 respects. 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's opportunities, I'll call it outside the walls of HGH, to invest in that natural growth in demand. The second piece that we believe exists is opportunities inside of HGH. 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 exists 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're actually in our alpha pilot on our clinical system upgrade. We'll 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 ACA.

Our next question comes from Pito Chikaring with Deutsche Bank.

Hey, 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 inpatient surgeries are so weak on easy comps and why I didn't see a bigger increase in outpatient surgeries. We've seen that some medical companies report very strong U.S. surgical growth, so just trying to understand the delta. And also, what do you see when you grow inpatient surgeries and outpatient surgeries in 2023? Thanks so much.

So, Peter, this is Bill. I think our surgical volume, the most thing they influenced that was we had one less business day, one less surgical day. And so, you know, that could account for a point and a half or two of that trend. And I don't think there's any other trends that we observed in our outpatient or inpatient surgery or call out other than just one less operating day. You know, going forward, I would say that, you know, we would anticipate our surgical volume to reflect our longer-term trends, which has historically been somewhere around that two-point growth. And again, there's variables that fluctuate on that, but That was the issue on the flat surgical volume for Q4. It was nothing other than one less surgical day.

Our next question comes from Kevin Fishbeck 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 framework? Obviously, COVID's a headwind, 340B's 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 and what you're renegotiating today. Thanks.

Yeah, Kevin, let me start with that. So I said in my prepared remarks, we're anticipating revenue per equivalent emission 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 the closer to 3% number, which would be historically, we would see 2% to 3% growth. So it really moves us back into our historical pricing trends, what we would see pre-COVID. It's just that we're having to jump over some of that loss of COVID. That was the 2% guidance in a revenue per equivalent emission. If you adjust that, it'd be closer to three, which is aligned 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 Anne Hines 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 nursing 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, we're somewhere around 13 or 14, excuse me, 14% for nursing turnover. We're on a run right 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 with external benchmarks and so forth. So we're really encouraged by the progress our teams have made. And again, over the last six 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 then on the emergency room, I brought it to, you know, more than emergency room, just hospital-based physician. We have talked about in the past, we are seeing some increased pressures for subsidies around emergency 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. It rolls through, as I mentioned in the previous question, in our other operating expenses. And 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.

All right. Thanks.

Yep.

Our next question comes from Brian Tenculet with Jefferies.

Hey, good morning, guys. I guess, Sam, follow-up to Ann's question and to Bill's answer to that. I saw that you exercised the call option and the envision in JV last week. So just curious how you're thinking about operationalizing that and what would change for HCA as you bring those positions back in-house and maybe just thoughts on the P&L and balance sheet impacts 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-surg 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 Stefan Baxter with Wells Fargo.

Hi, good morning. I 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. How are you thinking about where the COVID figure goes in 2023 compared to the 5.2% of admissions in 2022? And the implication being, you know, I'd love to hear how you're thinking about non-COVID admission growth in 2023. Thank you. Yes, I'll start with that.

So, you know, we expect a continued decline of COVID admissions. You know, as you've mentioned and I've 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 is somewhere around that 2% number. And that's embedded within the equivalent admission guidance that I gave between 2% to 3%. And again, we'll continue to monitor that as we go through the year. We continue to believe that there's strong demand in our markets and we're positioned well to serve that demand. Inpatient volume, we're thinking hovering around two, 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 emissions that our guidance entails.

Our next question comes from Scott Fidele with Stevens.

Hi, thanks. Good morning. I'm 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.

Yeah, 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 Our non-COVID case 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? Yeah.

Yeah, that would be embedded in our revenue per equivalent emission 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 portfolio.

And Bill, if I can add, I think it's important for everybody to understand that 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're more significant programs. They're 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's part of our strategy. We're 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 in 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 that's embedded inside of a real strategic initiative that we have.

Okay, thank you.

Our next question comes from Calvin Sternig with J.P. Morgan.

Hey, good morning. Looks like another strong quarter for ER volumes. Can you talk a bit about the trends you've seen there the last few quarters in terms of payer and acuity mix and what you're expecting from three? Sort of related, you know, 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 either 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. You know, 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've 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 health care 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 three 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've had over the past three years. But nonetheless, we've 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, very significant development opportunity there for us across our communities, and we're investing in that. Our urgent care center platform continues to grow. We're 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've had in the past. And we're encouraged by how that fits into our networks in a very productive way. So we're 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.

Yeah, 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 the What sort of growth you're 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 that investment spend was pressuring on 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?

Yeah, this is Bill on the investments. You know, when you think about the technology investments, the investments we're making in some of the clinical transformation. And I'd also say with the expansion of our nursing schools going forward, probably somewhere around an incremental investment of $150 million in 23 compared to what we ran in 22. All in, 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've 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're making in clinical education and other components of our labor agenda, we're starting to see, you know, more favorable trends in our recruitment function that we think, if they carry into 2023 and through the year, should be positive for us.

Great. Thanks. Our next question comes from Jason Casorla with Citigroup.

Great, thanks for taking my question. I just wanted to ask a bit more on your capital priorities. You know, you've recently divested ownership in some hospitals, but just wondering, you know, how you're viewing the M&A backdrop and if you're seeing opportunities to increase your footprint in your current markets or potentially entering into new markets. And then just on share repurchases, You know, you've increased your authorization by $3 billion. You have $4.5 billion left remaining, which has been light of the $7 billion you did this year. Just curious how you're thinking about share repurchases in the context of your larger capital deployment priorities. Thanks.

Yeah, let me take the latter one first. You know, I think share repurchases has been an important part of our overall balanced capital allocation. As you mentioned, we did $7 billion in 2022. We'll have authorization close to $4.5 billion this year. I think we'd plan on completing the majority of it sometime in this calendar year with a little bit of roll forward afterwards. And again, we'll 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 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'll continue to look for those. We do have a pipeline of greenfield hospitals because the acquisition environment is not as robust in 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 Vallecatrum 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 to follow up on that topic, 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 4Q22 that might be flowing at least into the early part of 23 for various reasons. Just curious on any visibility on early 23 at this stage. Thanks.

It's hard for us to really judge whether there's 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're 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 Purse 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 effect at the higher rates 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 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 2022. were in line with our expectations, which was around mid-single-digit inflators. So those have to work their way into the 2023 portfolio of contracts and on into the 2024. So we are encouraged by the outcomes of those negotiations. I think there's a general recognition in the payer community that the input costs for providers is up, are up. And so given those inflationary pressures, they recognize that there's a sensitivity to responding to that. And we're trying to be appropriate in our ask, and I think that's been received well, and we've been able to close these contracts reasonably timely. So we still have, you know, 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 on into 24. We're about 40% contracted on 24. Again, the tail effect of some of the closed contract negotiations that we've just achieved will carry into 2024.

Our next question comes from Joshua Raskin with Nefron Research.

Hi, thanks for taking the question. I know CapEx guidance for 2023 is only down slightly, and I know it's still January, but it'd be the first time in a long, long time that 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's anything that could be tempering that investment.

Yeah, John, I don't think there's anything tempering 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 4.4 to 4.3. It's actually up compared to where our initial expectations are. But as a summary, we still see very good opportunities to employ capital, we believe, to capture growth opportunities in the marketplace. And we've talked about some of that, whether that be through our freestanding EDs, whether it's some development of new hospitals, whether it 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 Mock 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 multi-year contracts? Thanks.

Well, thank you for the question. Our teams and our supply chain teams have done an incredible job over the past 12 to 18 months on our supply cost portfolio and especially with the backdrop of inflationary increases. And we've talked about through the year, we've been really seeing really positive trends in but 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 at 23. That would imply our supply cost per unit is somewhere around that 2% level, plus or minus a little bit. But again, we're expecting continued good results in that. And again, our team's doing a nice job. But we can keep that supply cost as 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.

Do you know how hard it is to be clever with a question after all these good questions?

You'll figure something out, John.

Like three of my questions got stolen in the last five minutes. Where's the fairness? 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 costs per either for revenue or per unit? How does that factor into a savings algorithm for us to think about?

How it affects our revenue per unit?

No, I mean, either salary is a percent of adjusted MIPS or salary is a percent of revenue. How does reducing turnover, if you reduce turnover by, say, 500 MIPS, how would that affect the labor margin?

Well, in theory, it will flow through as reduction of our contract labor. And so the margin, if you will, on the contract labor is we replace an individual from a contractor to an employed one. is that we'll save that margin and be able to reinvest. And what we've been able to do this year is reinvest back into our employed 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 spends. I mean, there's a lot of components into that. And as we said, we think we can maintain our labor costs, a percent of revenue where we are finished this year. You know, 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 so much.

Thanks, John. There are no further questions at this time. I now turn the call over back to Mr. Frank Morgan. Thank you.

Kevin, thank you for your help today, and thanks to everyone for joining us on this call. We hope you have a great weekend. I'm 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.