HCA Healthcare, Inc.

Welcome to the HCA Healthcare Second Quarter 2023 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 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 is included in today's press 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. Thank you for joining the call. The company produced solid earnings in the second quarter. These results reflected continued strong demand for its services and healthy operating margins. Across most areas of our business, we maintain the operational momentum that we experienced over the past three quarters. We believe this strength should continue into the second half of the year. Accordingly, we updated our earnings guidance for 2023 to reflect this outlook. Against the difficult comparison to the second quarter of 2022, diluted earnings per share increased to $4.29. Same facility volumes across the company were strong. Admissions grew 2.2% year over year. Inpatient surgeries increased 1.8%. Same facility equivalent admissions increased 3.7%. This growth was driven by emergency room visits, which grew 3.7%, and outpatient surgeries, which grew 3.3%. Other outpatient categories also grew, including outpatient cardiology procedures, which increased 5%. The growth in volumes was broad-based across the company's divisions and diversified within most service lines. Additionally, volumes were supported by strong acuity growth of 1.6% and a favorable payer mix from commercial adjusted admissions growth of 5%. These factors drove an increase in same facility revenue of 6.3% as compared to the prior year. In the quarter, we continue to invest in our people, and as a result, we saw improvements across virtually all key labor metrics. Turnover continues to decline for nurses and trended at an annualized rate of 17%. Nurse hiring remained strong in the quarter and for the year has increased by 9% as compared to last year. These positive results help reduce contract labor costs 20% compared to the second quarter last year. During the quarter, we improved available bed capacity. Instances where we could not accept patients from other hospitals declined and represented 0.8% of total admissions, down from 1.5% in the first quarter. We believe the significant investments we are making in our networks, our people, and our technology agenda will provide us with the necessary resources to improve our services and provide even higher quality care to our patients. As we look to the future, we remain encouraged by both the backdrop of strong demand that we expect in our markets and our overall competitive positioning within them. HEA Healthcare will continue to use its disciplined operating culture to execute our strategic and capital allocation plans. I want to thank our colleagues for their dedication and their overall effectiveness. So let me close with this. I want to speak to a recent event that we take very seriously. On July 10th, we announced that we had recently discovered that a list of certain information with respect to some of our patients was made available by an unknown and unauthorized party on an online forum. We have confirmed that the list does not include clinical information, payment information, or other sensitive information like passwords, driver's license, or social security numbers. Our forensic investigation is ongoing, but this event appears to be a theft from an external storage location that was exclusively used to format email messages. We are in the process of notifying all affected patients in accordance with our legal and regulatory obligations, and not unexpectedly, we have been named as a defendant in multiple class action lawsuits. This incident has not caused any disruption to our day-to-day operations, nor do we believe it will materially impact our business or financial results. HCA Healthcare believes the privacy of its patients is a vital part of its mission and remains committed to maintaining the security of their personal information. With that, I will turn the call to Bill for more details on the quarter's results.

Great. Thank you, Sam. Good morning, everyone. I will provide some additional comments on our performance for the quarter. Consolidated net revenue increased 7% to $15.86 billion from $14.82 billion in the prior year period. This is driven by 4% growth in equivalent emissions and 2.9% increase in revenue per equivalent emission. We remain pleased with our team's management of operating costs, even with the backdrop of inflation. Our consolidated adjusted EBITDA margin was 19.3% in the quarter. During the quarter, we completed our transaction to acquire a majority stake in the Valesco joint venture, and we are now consolidating the operations of this venture. This reduced our consolidated margins approximately 30 basis points in the quarter. We believe this transaction not only mitigates business risk with the envisioned bankruptcy proceedings, but will also further support alignment between our hospital-based physicians and our hospital care teams on improving quality, patient satisfaction, and efficiencies. When you consider this transaction and the $145 million payer settlement we recognized last quarter, our adjusted EBITDA margins have remained consistent between the first and second quarters. So let me speak to some cash flow and capital allocation metrics as they remain a key part of our long-term growth and value creation strategy. Our cash flow from operations increased $845 million in the quarter from $1.63 billion in the prior year to $2.475 billion this year. Capital spending was just over $1.2 billion. We paid $164 million in dividends and repurchased $915 million of our stock during the quarter. Our debt to adjusted EBITDA leverage ratio remains near the low end of our stated leverage range of three to four times. As noted in our release this morning, we are updating our full year 2023 guidance as follows. We expect revenues to range between $63.25 billion and $64.75 billion. We expect net income attributable to HCA Healthcare to range between $4.9 billion and $5.255 billion. We expect full-year adjusted EBITDA to range between $12.3 billion and $12.8 billion. We expect full-year diluted earnings per share to range between $17.70 and $18.90. And we expect capital spending to approximate $4.7 billion during the year. So with that, I'll turn the call over to Frank and open it up for Q&A.

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

In order to ask a question, please press star, then the number one on your telephone keypad. And your first question comes from A.J. Rice with Credit Suisse.

Hi, everybody. Maybe just, I know Sam has prepared remarks, said that performance was solid across divisions. I wondered, there's been some discussion this quarter about, you know, Florida and Texas had come back early and had enjoyed strong volume. Now the rest of the country is rebounding. I wonder if you'd comment on that. There was also discussion from some of the managed care guys about particularly seeing strength in Medicare and Medicare Advantage and some pent-up demand being unleashed there. I wondered if you would comment on that. whether you're seeing any of that as well.

All right. Thank you, AJ. As I mentioned in my comments, our volume growth was broad-based across our divisions. I think we had 13 out of 16 divisions in the company that had admission growth and adjusted admission growth. We clearly have some divisions that don't perform the same pretty much every every quarter, but it was fairly broad-based across top-line metrics, admissions, adjusted admissions, payer mix improvements, and so forth. So a fairly consistent performance. We did have a couple of divisions. that struggled, but one was isolated in Florida. The other one was isolated more out west in the Midwest. And so for the most part, we were really pleased with the overall performance that we had across the geographies of the company. And it's interesting. I was looking at something yesterday. We have, from an admission standpoint, almost – 72% of our hospitals have greater than 2% admission growth for the year. And this includes a little bit of pressure from COVID in the first part of the year from a comparison standpoint. We have very significant performance from the surgery standpoint as well, where almost 50% of our hospitals have inpatient surgery growth above 2%. So really consistent portfolio performance that speaks to the strength of our markets, I think the competitive positioning of our facilities, and then the ongoing network development and physician development that we have as part of our core strategy.

The next question comes from the line of Ben Hendricks with RBC Capital Markets.

Hi, thank you. With regard to your updated guidance, can you provide some more color on what you're assuming for SWB supplies and other operating expense, particularly professional fees, through the second half versus what you've seen thus far this year, and then anything to call out that would alter typical cadence through the second half? Thanks.

Yeah, Ben, this is Bill. Let me start. You know, I think our updated guidance is a reflection of what we're observing in the market in our year-to-date performance, which continues to be strong demand, good payer mix and acuity trends, an improving labor market. I think our team's responded well to the inflationary and professional view. And then we still have, you know, a really strong balance sheet to be able to invest in the growth opportunities. I think net-net, when I think about the margin profile of the company between the first half and the second half of the year, we'd expect the margin profile to be slightly better in the second half of the year. I think our salary, wages, and benefits as a percent of revenue will run mostly where they're running here today. Same with supplies. We have seen a little pressure on the professional fees, and we don't think that same pressure will exist in the balance of the year, but we'll be able to manage through that.

The next question comes from Whit Mayo with Lyric Partners.

Hey, thanks. Good morning. Maybe just a question around labor. I think I heard you say, Bill, that contract labor improved maybe 20% year over year. Did it change much throughout the quarter? Just trying to get a sense of maybe the exit rate and expectations for the second half of the year. Thanks.

Yeah, I mean, we're pleased with the labor environment. We did mention our contract labor is down 20% versus the prior year. It's improved as well sequentially between the Q2 and Q1. Our hiring metrics are up. Turnover is down. And I think that portends good things for us going through the balance of the year. You know, we mentioned before our contract labor costs and percent of our SWB was under seven. I think it was 6.8% in the quarter. So, again, I think we're pleased with that, especially as we go through the summer months. Some of our hires get through kind of their orientation process and then we get into the balance of the year. We would expect some continued improvements.

The next question comes from Gary Taylor with Cohen.

Hey, good morning, guys. Thanks for taking the call. Just two quick ones for me. Bill, I might have missed it, but I know often you kind of run through some of the managed care metrics on admissions, you know, adjusted admission surgeries. I wonder if you could rattle off a few of those for us. And then secondly, I just want to make sure I understood on the Envision joint venture, I think we were thinking that was maybe roughly $250 million of revenue. But do all the expenses lie in the SW&B line? Is that where those reside down to kind of a roughly EBITDA break even?

Yeah, Gary, let me start that. Some of our managed care, I think, as we mentioned, as Stan mentioned in her comments, really favorable payer mix. Our managed care admissions were up over 4% in the quarter. Adjusted admissions were 5%. I think we mentioned that in our prepared comments. Emergency room visits, managed care were up 9.8% in the quarter. And again, good acuity of case mix growth. So really pleased with the payer mix that we're seeing, and that showed itself in the commercial trends. Relative to the Valesco joint venture, your numbers are really close. About 70% to 75% of the revenue is in SWB, and the rest is in other operating. And you're right, it's basically a break-even proposition here. a little north of $220 million of revenue that we had in the quarter as we consolidated that.

Thank you.

And your next question will come from Justin Lake with Wolf Research.

Thanks. Question on the pricing in the quarter. So with strong acuity and strong payer mix, Maybe, can you remind us, is there anything in the second quarter that I might have slipped that, you know, drove the pricing? I would have expected it to be a little bit better given those mixed items and strong commercial pricing. And then, Bill, can you just give us what you expect in the back half of the year for volumes with that updated guidance? Thanks.

Yeah, you know, Justin, nothing specific we'll call out. I mean, obviously, when we do year-over-year comparisons, COVID was still an impact for us. We had roughly 40 million of COVID support payments last year that we'll have this year. Our COVID admissions were 3% of total last year, roughly one. So that's still influencing a little bit on the revenue line. On our volume projections for the balance of the year, I think we'll be largely consistent where we've seen thus far our year-to-date admissions, same facility, are about 3.3%, I would think, for the full year. We hover around 3% as well for the balance of the year. Our adjusted emissions year-to-date are 5.6%. I would think by the time we finish full year, it's still 5% to 6% adjusted emissions. So I think the volume streams we would expect in the second half of the year would be, you know, pretty consistent with what we've seen in the first half of the year.

And the next question will come from Peter Chikering with Detroit Bank. Hey, Ed.

Good morning, guys. Thanks for taking my question. As I look at the implied revenue raise and EBITDA raise back half the year, I'm trying to understand the flow-through of how much revenue raises should flow through into EBITDA upside. So how are the trackings for 2023 versus pre-COVID years?

Well, when I think about that, when I look at the raise, it's based on where we performed in our views. of the position going forward. We do expect continuing improvement in the labor market. But as I said, I think as a percent of revenue we hold, I think the margin profile overall for the second half of the year will be slightly better than the margin profile we saw in the first half of the year. And that all in all is contributing to the guidance raised. You know, I'm reminded we've raised our guidance almost the midpoint of our even all guidance, roughly $450 million from where we where we turn the calendar. So I think all that's reflective in our considerations right now.

Yeah, and Bill, let me add a point here. I think it's a relevant point. Obviously, we've dealt with a fairly unprecedented labor market over the last three years or so. And we do believe, as Bill indicated earlier, it's moderating. We've also dealt with sort of an unprecedented hospital-based physician dynamic at a macro level. And if you just take a snapshot of where we are six months into this year versus where we were pre-pandemic when neither of these macro forces were in place, we've actually increased our margins by comparison to 2019. So I think it's sort of a testament to the ability of the company to adjust operationally to dynamics and continue to move forward with our strategy. As we've mentioned before, we think our competitive positioning has improved compared to where we were pre-pandemic. Our market share has also improved during that time period. So we continue to believe that the company has the wherewithal to adjust to these factors, continue to move ahead in a very positive way, and generate the results that we all want.

Great, thanks so much.

And your next question comes from Anne Hines with Mizuho Group.

Thanks, good morning. I know it's early, but do you have any observations on how Medicaid determinations is impacting your business? I know one of your biggest states, Texas, started early. It sounds like it's been a little bit messy. So any early observations? And can you remind us if you have anything from Medicaid determinations and your guidance, and do you think this process is going to be an overall positive or negative for HCA? Thanks.

Dan, thanks for that. It's a good question, and you're right, it is still early, and we've got, you know, a pretty organized approach to not only continue to watch the market but respond to it on there. So we haven't seen any negative or any material impact on this today. We think what we're seeing, many of the patients who are receiving determination that there's some opportunity to continue to get them re-enrolled in Medicaid. Some of them are more technical. They either didn't complete an application or some other aspect of that. So our teams are trying to identify those individuals as best they can, assist them in gaining coverage. We remain encouraged by many of the studies that the people who are being redetermined off will qualify either for coverage in an employer-sponsored plan or qualify for coverage in the health insurance marketplace. And so we'll continue to watch that as that unfolds. But no impact right now. Nothing in our guidance is assumed for Medicaid redetermination. We believe over the long run, you know, there could be some positive transfer in this, but we'll just have to wait to see how that plays out.

And the next question comes from Kevin Fitchback with Bank of America.

Great, thanks. Wanted to just maybe dig in a little bit more to kind of how you're thinking about the volume growth in the back half of the year. I guess, you know, when you think about things trending relatively similar in the back half versus the first half, I guess the way we had been thinking about it anyway was that last year it felt like as COVID spiked at the beginning of the year and then became less and less of an issue, that volume just started to kind of normalize in the back half of the year. And so that maybe the comp would be a little bit more difficult as you got into the Q4 and the growth rate might slow. So I just want to think about how you're thinking about, you know, volume growth and where you are versus maybe long-term trend lines and things like that. How do you put that into context about, you know, thinking this weighted growth will continue in the back half of the year?

Kevin, this is Sam. Let me give you sort of the backdrop, we think, of what exists. for us with respect to volume. And this is more of a general commentary. I'll let Bill sort of reconcile the back half of the year to the first half of the year with numbers. I'm not sure I can do that at this particular point in time. As we've said before, and we continue to believe this, we feel that within our markets there's unique attributes that are driving solid demand for health care services, you know, Population growth continues to be strong in Texas and Florida and Utah, Nevada, South Carolina, pretty much Tennessee. Across the board, we're experiencing population growth within our markets. The second point is we're investing very significantly in our strategy and our positioning within these communities so that we can respond to our patient needs, put our facilities in the best position to grow, and And we think that's going to help us sustain market share growth as we move forward. What we're seeing is that our overall volume assumptions are supported by acuity. Acuity has maintained some of that strategic. Some of that, I think, is the dynamics that exist within the markets. And then the second support mechanism that's in place, and we view this positively, is the payer mix dynamic. We have seen throughout the first half of the year commercial admissions outpace our total admissions. Again, we think that's reflective of a strong economy and job positioning that a lot of people have in our communities, as well as the exchanges. And so we think those will continue on into the last half of this year, and we're optimistic that those will continue on into the future, at least in the near term. So, Bill, you can maybe try to reconcile.

Well, I'll just say, I mean, when we think about projecting going forward, we try to take all those factors into consideration that Sam mentioned and where we're seeing here today. Mind you, when we originally said our guides, we anticipated 1% to 2% admission growth. mid-single-digit outpatient growth. So that's still hovering around 2% to 3% equivalent admission growth was our expectation. And, you know, given the fact that we're seeing north of 3% admission growth and, you know, 5.5% adjusted admission, that's informing our position for the balance of the year. So I still think around three is a good number for the full year now, based on the first six months of the year. We continue to see good outpatient revenue growth. And so that should support the 5% to 6% equivalent emission expectation for the full year.

Yeah, and Bill, if I can add one thing. With respect to our investments in our networks, we have, at this particular juncture, the largest pipeline of projects that are in motion, including our outpatient development components, which are very robust, as well as other inpatient and facility needs there. So our pipeline, from an organic standpoint as far as capital, that we will see hit the market in latter 23, 24, early 25, is more robust than we've seen in pretty much recent years.

All right, great. Thanks.

The next question comes from Brian Tankwood with Jefferies.

Hey, good morning, guys. Bill, you touched on the impact of Envision being a 30 basis point drag. I know there's a lot of noise happening with American Physician Partners and just stuff moving around with physician staff. As you think about that drag, is there opportunity to bring this up, or is that like a more structural thing where you've had to bring in physicians to bring in in-house capabilities for physician staffing. Thanks.

Yeah, this is Sam. Let me start with that, and Bill can color in here. As I mentioned, the backdrop in the hospital-based physician space has been very difficult over the past few years because of multiple factors. And for us, in the short run, we have had to respond to these difficulties to maintain capacity and service availability and so forth, And so we did what we had to do to make sure that our business continued to move forward appropriately. And for the most part, we've overcome these pressures and been able to grow, and we've increased our earnings expectations for the year in the face of some of these challenges. As Bill mentioned, we don't anticipate the same level of increases in pressures in the last half of the year, although we'll have some, but it's not going to nearly be what we've experienced in the first part, we don't think. And we do believe with the Valesco operations, we now have a platform that gives us the potential to respond better to these types of challenges and possibly integrate hospital-based physicians into our hospital operations even more effectively, producing better clinical performance, efficiency, and even growth, we think. And I'll say this again. I said it earlier. We have a pattern of responding to different kind of operational challenges, whatever they happen to be. We've had labor, as I mentioned. We've had position costs. Currently, we've had uninsured in the past, and we've tended to overcome them. In the short run, sometimes, they can create an individual pressure. But I think the scale of HCA... the resources that we have and the ability to execute allows us to move through some of these pressures over time and get where we want to be.

Thank you.

And the next question comes from Lance Wilkes with Bernstein.

Great, thanks. I've got a strategic question for you on digital health and AI. I'm just interested in the initiatives that you're kind of putting in place through the organization at this point where you're maybe investing on the venture capital side here? And long-term, what you see as the opportunity for this, whether it's, you know, potentially reduced compensation or an ability to expand volume across the footprint?

This is Sam. We have a growing digital agenda in our company, and I'm very excited about what the prospects are for us around that. We are investing in a new clinical system, which we think is going to allow us to move information to the cloud more efficiently. As a matter of fact, move standard data sets into the cloud so that we can then use big data even more effectively and infuse that back into the care process. We will couple our digital agenda with something we're calling Care Transformation Innovations, And inside of that, we believe we have opportunities to improve care processes, eliminate a lot of the variation that exists today in our company, create better quality, and at the same time, more efficiencies. Artificial intelligence, we believe, will play a huge part in that. It's way early for us to know exactly what that will be and how that will influence our agenda, but we're encouraged by the prospects for it. We are partnering with some very sophisticated companies to help us push through this in ways that I think will accelerate our agenda and inform it with more expertise than what we have internally available. So we're excited about what this can yield for us as we push into our next life cycle, if you will, and we'll wait to see what artificial intelligence, in fact, can do. But we view it as a positive potential for us in a very significant way.

Great, thanks.

And the next question comes from Andrew Mock with UBS.

Hi, good morning. Just wanted to follow up on the pricing discussion, maybe from a different angle. Revenue per outpatient equivalent looks like it was down about 1% in the quarter, which seems to be weighing on strong inpatient pricing up 6%. Can you help us understand the pricing and mixed trends across your outpatient platform that are causing that unit revenue metric to blend down this year? Thanks.

Well, I think we're pleased with the outpatient growth that we're seeing. If you look at the overall outpatient growth that we have, it's, you know, our expectation was mid-single digits. We're well north of that in the quarter and on a year-to-date basis. You know, there's always a little bit of a mix issue that occurs. Our emergency room volume was up, what, 3.7%, which where a lot of your outpatient or outpatient surgical growth was up 3.3% in the quarter. So I think those are really good stats on me. On the outpatient revenue per unit, you know, there's always a blend between surgical, emergency room, and diagnostic. But I would say overall we're very pleased with the outpatient overall growth that we are seeing.

Yeah, and Bill, just, you know, the second quarter overall outpatient revenue growth was actually up over the first quarter twice. So we are seeing some acceleration. There's a lot of moving parts that Bill just alluded to to outpatient revenue between physician clinics, urgent care, all the way up to outpatient cardiology procedures, which tend to be our high preimbursed type of procedures. And so the mix of that can influence the outpatient. We tend to look at it in the aggregate. And for the most part, our aggregate revenue growth has been stronger in the second quarter than it was in the first quarter. And then within sort of the pricing elements, we continue to get the targeted price increases that we want in both our inpatient and our outpatient businesses. So it's more to Bill's point sort of the mix and the mixture of all of the different components in a way that has produced solid growth for us.

Great. Thank you.

Next question comes from Calvin Sternick with J.P. Morgan.

Hey, good morning. I wanted to ask about the commercial rate cycle. I think last quarter you said you guys are about two-thirds of the way through 2024 and about a quarter of the way through 2025. Can you give us an update on the progress and how those rate discussions are evolving? Thanks.

Yeah, they're evolving pretty consistent. As we just mentioned, we're continuing to see rates in kind of that mid-single-digit level. As far as contracting for 2024, I think we're a little north of 70% for 2024 now and I think our efforts continue. I think our relationships with our major payers continue to be strong, and we're pleased with the progress we're making in that area.

And the next question comes from Scott Fidel with Stevens.

Hi, thanks. I'm interested just as, again, the backdrop where the managed care payers are seeing the higher medical cost trends this year, whether you're seeing any changes in behaviors when interfacing with them from a prior authorization or utilization management type perspective, or are things pretty consistent there? And then just a quick follow-up, just on the slight raise in the CapEx, is that just related to the general broad-based investments that Sam just talked about, or are there any specific projects that you would cite around the update to the CapEx, Guy? Thanks.

Yeah, I'm going to try to take both of those. I think as we maybe mentioned in the past, You know, as you think about authorization and medical necessity reviews, you know, those activities have picked up again as, you know, during the COVID period of time, those have eased a little bit. But we still see a lot of friction, if you will, as you go through that effort. We work with our payers to try to resolve those appropriately, make sure that we defend our positions where necessary. But there is a level of activity that both us and the payers have to devote to try to smooth through that process. But we tend to be able to work our way through it. On the CapEx, I think it's simply reflective of the opportunities we see in the market to continue to deploy capital for growth. Fortunately, we continue to see really strong cash flow to be able to support that CapEx. And again, I think it's reflective of the growth opportunities we see in the market.

And Bill, as we mentioned on the last call, we have acquired some land for future expansion in some of these fast-growing markets that we serve, and that's put some upward pressure on our capital spending, but we believe those are long-term good decisions for us.

The next question comes from Jason Casorla with Citigroup.

Yeah, great. Thanks for taking that question. Just wanted to ask a little bit more on the labor front. You know, thinking about all the efforts and programs that you put in place contributing to the better turnover and hiring trends. I guess, is there a way to help frame what inning you're in as it relates to these efforts? You know, where do you like to see some of the outputs on turnover retention kind of move to? Or any other thoughts on the labor front and the strategies there? Thanks.

Yes, this is Sam. Thank you for that question. You know, as I mentioned, we have invested very heavily in our people agenda over the past few years. We've increased our capacity within our recruiting function, and our recruiting efforts are yielding strong hiring, and we believe that will continue on into the latter half of the year. Our retention efforts with respect to responding to our employees' needs so that they have the necessary resources and tools to be effective, in their day-to-day jobs. We're getting better at that. That's helping turnover. Turnover is approaching pre-pandemic levels, especially in the nursing area. We're a few points above pre-pandemic, but if you annualize the second quarter turnover, it would suggest less than that. So we're encouraged by that, and we do believe we have opportunities to continue improvement in that area. With contract labor, as Bill mentioned, we expect to see improvements as we move through the last half of the year. And then I'm very excited about our workforce development initiatives. We continue to invest heavily in Galen College of Nursing. They're expanding each quarter, it seems, into new markets. and establishing new relationships and new opportunities for people and for our company. And then we're also investing in what we're calling our Centers for Clinical Advancement, which is our ongoing clinical education for our people so that they can upskill their capabilities and competencies and put them in a position to either deliver better care or grow in their own individual career. So what inning are we in? We're in the middle innings in some of the areas. And so we will wait to see how the latter half of the year plays out. But all in all, I think tremendous results. We're very competitive, we believe. across the organization with our compensation and benefit programs. And as I mentioned earlier, we've been able to navigate through these difficult periods and maintain margins. I think our labor costs, again, if you just look at 2019 as a proxy, our labor costs in 2023 are below, as a percent of revenue, 2019. And again, that's in the face of a very difficult labor market.

Great, thank you.

The next question comes from Jamie Pierce with Goldman Sachs.

Hey, thank you. Good morning. Can you comment on seasonality expectations for the third quarter? Anything beyond normal seasonality from a headwind or tailwind perspective that we should be thinking about? And I think normally revenues down slightly and EBITDA down maybe mid-single digits to high single digits. Is that the right way to be thinking about the third quarter and anything in July that's informing that? And then I think there's an earlier question on backlog that may not have been fully answered. I'd love your thoughts on that as well. Thank you.

We mentioned at the end of the fourth quarter that we were starting to see normal seasonality patterns materialize. And we've seen that so far through the first half of this year. And we think that will continue on into next the second half of this year. The third quarter is not as strong as the fourth quarter. The fourth quarter is always the strongest quarter of the year for us, given the outpatient activity and deductibles and so forth. And so we think the third and fourth quarter will be similar in patterns to pre-pandemic seasonality, and that's what's reflected in our guidance.

And the next question will come from Stephen Valiquick. Your line is open.

Great, thanks. Good morning, everybody. So I guess as a follow-up to just some of these prior questions on the labor and commercial rate updates, there was some conjecture for ACA that the company didn't have quite as many commercial payer contracts up for renewal for fiscal 23 to capture some better rates for elevated labor costs, which you had more coming up for renewal in 24. Now that the noise levels kind of died down somewhat here in mid-23 on overall labor cost pressure, certainly versus 12, 15 months ago, I guess the question is, do you still have confidence to potentially capture, you know, potentially suddenly better than average commercial rate updates for fiscal 24, if labor pressure may still be in the key variable within those discussions, or are those going to be a little bit tougher now, given that some of the pressure has subsided? I just want to get your kind of latest thoughts around that. Thanks.

Well, this is Sam. Bill indicated that we're 70% contracted on 24 around our targeted escalation objective. Labor costs, as you mentioned, are moderating some, yes. There's still inflationary pressures underneath it. as one would expect. Now we have physician cost pressures with respect to pro fees, and our belief is that will have to be paid for by someone. And so that will become a new factor in our thinking and our justification for appropriate pricing increases. So our costs are not just one category. We have multiple categories, as you can see on the income statement, and all of that factors into our considerations when we're negotiating.

And the next question will come from Joshua Raskin with Nefron Research.

Hi, thanks. Good morning. Were there any meaningful differences in the payer mix on the outpatient side, you know, an obvious focus on Medicare and specifically Medicare Advantage volumes? And are you seeing anything in the Medicare market that would support higher levels of demand than we saw, you know, last quarter or the quarter before, anything that you feel like is inflecting?

Yeah, Josh, when I look at kind of the admissions versus adjusted admissions between the payer categories, they're comparable. You know, our Medicare adjusted admissions were up 5%. Our managed care adjusted admissions were up 5%, as we mentioned earlier, you know, fueled by emergency room growth. So, I think the trends are pretty comparable among the payer categories. We're And that's strengthening payer mix. That's, I think, positive trends for us. So nothing else underneath the outpatient area that I would distinguish other than we continue to see good commercial ER traffic. Our commercial outpatient was up, pushing close to 4% as well. So, again, I think they're pretty comparable in terms of the general trends we're seeing.

I would say, Bill, just to put a little bit of color on the outpatient, our commercial outpatient revenue growth is clearly outpacing our Medicare outpatient revenue growth. Some of the adjusted admissions are influenced by some of the calculations, if you will, but we are seeing really solid commercial outpatient revenue growth. Again, influenced by the ER, influenced by surgeries, which are represented in roughly 50% to 55% commercial, so good growth there, and all that yields solid commercial revenue growth.

All right. Thanks.

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

Bailey, thank you so much for your help today. Thanks, everyone, for joining our call. I hope you have a wonderful rest of your week, and I'm around this afternoon if we can answer any different questions you might have. Thank you very much. Have a great day.

This concludes today's conference call. You may now disconnect.