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Jeremy
Host
Hello. Welcome to the HCA Healthcare Third Quarter 2024 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 the Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir.
Frank Morgan
Vice President of Investor Relations
Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Payson, and CFO, Mike Marks. Sam and Mike will provide some prepared remarks, and then we'll take questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements that are based on management's current expectations, numerous risks, uncertainties, and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Shareholder, 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.
Sam Payson
CEO
All right, good morning to everybody. Before we get to the financial results for the quarter, I want to share the heroic efforts by our people as they recently responded to, in less than two weeks, two major hurricanes. that impacted some of our communities and facilities. Over the years, HCA Healthcare has developed industry-leading enterprise capabilities to support our hospitals during disasters. We have used learnings from past experiences, conducted extensive training, and built strong partnerships with key vendors to create a systematic approach to preparing for and responding to major events like hurricanes. These resources were put to use by our teams with outstanding results over these past few weeks as a number of hospitals were in the path of these storms. But what's even more impressive is the unwavering dedication, remarkable bravery, and outstanding leadership demonstrated by the people in our company who worked throughout these storms and in many instances multiple days without rest to ensure our patients and colleagues were safe. Leveraging corporate capabilities effectively to support committed people in our facilities is fundamentally our formula for success. We call it the HDA way. It works well in normal times, it worked well in the pandemic, and now it has proven itself again in these hurricanes. A few of our communities were significantly impacted by these storms. This is especially evident in the Asheville area and parts of Tampa, St. Pete. Given the basic infrastructure role we play in our communities and the duty we have to be there for them in these situations, we have not veered from doing the right thing. I'm humbled by the determination and teamwork of HCA people. I'm honored to be associated with them, and I'm proud of how they continually show up in difficult circumstances and deliver tremendously positive outcomes for our patients, each other, and their communities. They truly demonstrate that they are, above all else, committed to the care and improvement of human life. And I want to thank them for what they do to make this company great. Now to the quarter's results. Like the first half of the year, the results for the third quarter were strong and reflected solid revenue growth and margin improvement. Diluted earnings per share, as adjusted, increased 25% to $4.90. These results include an estimated impact of 15 cents per share from lost revenue and additional expenses caused by hurricane. While the rest of our hospitals and outpatient facilities in the path of the storms are fully operational, we have two hospitals that continue to deal with the after effects of the storms. First, HCA Mission Hospital, which is the only hospital in the Asheville area, was affected by Hurricane Helene, and it has continued to operate and provide high-quality patient care, even with significant city infrastructure in disrepair, and that's primarily water. As a consequence of this storm, we anticipate incurring significant expenses and lost revenue related to these issues throughout the remainder of the year. We also expect some continued, but we think manageable, impact into 2025. As it pertains to Hurricane Milton, which hit Florida in October, our HCA Florida Largo Hospital was flooded. It is currently closed because of damage to the building's infrastructure. We anticipate significant repair expenses will be incurred at this hospital during the fourth quarter, in addition to losing revenues. Our teams, however, are working around the clock to reopen it in late December. HCA Healthcare has numerous examples from past hurricanes where our hospitals have recovered from major storms and become more productive than pre-storm performance. I believe we can produce similar results with these two hospitals in time as we move beyond the accurate effects of these most recent storms. During the quarter, volume growth across our markets and service lines, while modestly affected by Hurricane Helene, was strong and broad-based. On a same-facilities basis, inpatient admissions grew 4.5% as compared to the prior year. Adjusted admissions also grew 4.5%. Emergency room visits increased 4.6%. Inpatient surgeries were up 1.6%. Other volume categories, including cardiac procedures, inpatient rehab admissions, and obstetric volumes, had solid growth. Outpatient surgery was the only major service category that declined. It was down 2%. However, the revenue in this service line increased 5% because of acuity and payer mix. payer mix across other service lines, and acuity within inpatient services improved in the quarter. These factors help generate same facilities revenue growth of 7.1%. We continue to believe the investments we are making in our network development agenda drive value for our patients and the organization. By the end of this year, we expect to have added approximately 600 inpatient beds and 100 new outpatient facilities, bringing our total sites of care to over 2,600. Currently, the company has around $6 billion of projects under development. These investments, which should come online over the next few years, will add more capacity and and create greater access across our networks, allowing us to meet the growing demand for healthcare services we anticipate in our markets. Before I turn the call to Mike, I want to close with a few early thoughts on 2025. Our planning process, which includes continuing assessments of the hurricane-related impact, has not been completed. So I will caveat my comments with the fact that it is always difficult to predict with certainty the various components of our business, and these preliminary views may change. With respect to volume, we went into this year believing that growth would exceed our long-term demand assumptions of 2% to 3%, and throughout the year, it has. As we look to 2025, we assume volume growth will continue at elevated levels in terms range of 3% to 4% for the year. With respect to our earnings outlook for next year, we believe that the strong volume growth assumption coupled with an anticipated mostly stable operating environment should generate earnings growth near or slightly above the upper end of our long-term target ranges for both diluted earnings per share and adjusted EBITDA. As usual, in January, we will provide you with our guidance for 2025. And with that, I'll turn the call to Mike.
Mike Marks
CFO
Thank you, Sam, and good morning, everyone. We were pleased with the third quarter. We produced good volume growth in margins, especially when considering the impact of the hurricanes. I'll start with a few details of the two storms that impacted us recently. Hurricane Helene made landfall in the Big Bend area of Florida on September 26th, and impacted our communities and operations in Florida, Georgia, and North Carolina. We had 29 hospitals in the path of the storm, which had to prepare and respond. And financially, we have seen a loss of revenue and incurred additional expenses during the preparation, during storm, and the response phases. As an example, we are expecting to spend at least $13 million on water supply to Mission Hospital and our other healthcare facilities related to Hurricane Helene through the month of October, and city potable water supply is not projected to be reestablished at Mission Hospital for several more weeks. As Sam noted, we estimate that Hurricane Eileen impacted the third quarter by $50 million, or 15 cents per diluted share. Hurricane Milton hit the west coast of Florida just south of Sarasota on October 9th and impacted a large portion of the Florida Peninsula. We had over 34 hospitals in the path of this storm and that had to prepare and respond, including HCA Florida Largo hospital, which is still under repair. As we think about the ongoing impacts of both major hurricanes, we anticipate additional expenses and loss of revenue will be approximately 200 million to $300 million or 60 to 90 cents per diluted chair during the fourth quarter of 2024. This impact relates primarily to our hospitals in North Carolina and our Largo Hospital in Florida. These estimates do not include any insurance recoveries the company may receive in the future. I would like to add my appreciation to our care teams and all of the HCA colleagues who provided support during these storms, and my concern and prayers for the communities and the people impacted as we collectively recover and respond. It is a true honor to work with our colleagues and our physicians and to serve these communities. Now let me transition to our 2024 guidance. As noted in our release, we reaffirmed our 2024 estimated guidance ranges. Given the ongoing impact of the two major hurricanes on the remainder of the year, we estimate that the results are likely to be in the lower half of the ranges provided. Now to the results for the quarter. Sam reviewed our strong volumes, which resulted in revenue growth of 7.9% in the quarter over prior year. So I will focus on operating costs in the quarter. Adjusted EBITDA margin in the quarter improved 90 basis points over prior year. Labor cost as a percent of revenue improved 160 basis points from the prior year. We continue to see good results on contract labor, which improved 18% from the prior year and represented 4.6% of total labor costs. Supply cost as a percent of revenue increased 30 basis points over the prior year, but were relatively consistent sequentially. Other operating cost as a percent of revenue increased 40 basis points over the prior year. Professional fee cost growth over prior year moderated to 10% and was flat sequentially to the second quarter. We had expense growth associated with Medicaid supplemental payment programs, and we had increased repair maintenance costs related to Hurricane Helene. Medicaid supplemental payment programs provided a modest benefit to our third quarter 24 overall results. So a lot of moving parts in the quarter, but this was a solid quarter with over 13% growth in adjusted EBITDA, driven by strong core operating performance across our portfolio of markets. Moving to capital allocation, we continued to deploy a balanced strategy of allocating capital for long-term value creation. Cash flow from operations was $3.5 billion in the quarter. Capital expenditures totaled $1.19 billion, and we repurchased $1.79 billion of our outstanding shares during the quarter. We also paid $169 million in dividends. Our debt to adjusted EBITDA leverage remains at the low end of our stated guidance range, and we believe we are well positioned from a balance sheet perspective. Finally, as noted in our release, we now estimate capital expenditures for 2024 to be approximately $5 billion. This lower estimate is due primarily to the timing of capital projects, and we continue to see good opportunities for investing in our business. With that, Frank, I will turn over the call to you for questions.
Frank Morgan
Vice President of Investor Relations
Thank you, Mike. As a reminder, please limit yourself to one question so we might have as many as possible in the queue an opportunity to ask a question. Jeremy, you may now give instructions to those who would like to ask a question.
Jeremy
Host
Perfect. Thank you so much. If you would like to ask a question today, please press star followed by the number one on your telephone keypad. If you would like to remove yourself from the queue, again, just press star one. All right. The first question comes from the line of AJ Rice from Credit Suisse. Please go ahead.
AJ Rice
Credit Suisse
Thanks. Hi, everybody. Just maybe one point of clarification, then a question. So, on the outlook comments for 25, if we take the midpoint of your 24 guidance, 14 billion, and take 250 to 350 million of hurricane impact off of that, and then grow at the high end of your 4 to 6% range, we come up with something like 14.6 billion for 25. And then we layer in hurricane recovery on top of that. I just want to make sure we're all walking away with the right framework. Is that what you're saying? And then my broader question, just to throw that out, would be on your volume strength. Is, you know, of anniversary, the pickup in volume post-pandemic we saw last year, are there particular areas of service lines that are remaining strong that are worth calling out even as your anniversary, uh, what was strong trends last year?
Mike Marks
CFO
Thanks, Zach Jay. This is Mike. Um, as it relates to our 2025 commentary, let me say this, you know, we generally believe that the ongoing effects of the hurricanes in 2025, which we, as Sam said, we think are manageable, will be primarily in North Carolina as we expect our Tampa facility to be operational by the end of 2024. And we took these storms and the potential lingering effects into 2025 into account when we set this being near or slightly above the upper end of our long-term growth range. As Sam noted as well, we will give much more context and details on our 25 formal guidance in January. As it relates to volume, the only thing I might point, in addition to the point that you made relative to you know, strong volume pickups in the last part of last year is that sequentially from Q2 to Q3 of 2024, we increased same facility admissions by 1.4 percent, and that sequential increase is in line with our past sequential trend. So, that's our sense of volume.
Sam Payson
CEO
Yeah, and let me add to that, AJ. I think, you know, broadly, most of our service categories are growing, you really well and we think, you know, the emergency room continues to be a very important solution for people in our communities and it continues to grow and we continue to invest in it and we continue to improve our patient outcomes with our ER optimization agenda. We continue to see, you know, good strength in our cardiac business broadly across the organization and as I said, you know, across the geography of the company, we've had broad-based growth as well with very few challenges, if you will, across the important markets of our company.
Jeremy
Host
Our next question comes from the line of Ben Hendricks from RBC Capital. Please go ahead.
Ben Hendricks
RBC Capital
Thank you very much. A lot of discussion this earnings season around claim denial activity. I was wondering if you could touch on denial trends broadly. And then related to two midnight claims specifically, back in July you noted that you were just beginning to see adjudication of two midnight related claims from early in the year. You know, as we approach year end, can you offer any observations on the adjudication activity you're seeing around two midnight? And is there anything informing your view of when we may see behavioral changes among payers and how they process those short stay admissions? Thank you.
Mike Marks
CFO
Good morning, Ben. Thank you. Let me talk about denials generally first, and then we'll pivot to midnight impact in the quarter. You know, Ben, as we noted in our investor day, we have been working diligently on denial mitigation strategies through our integrated revenue cycle over the past several years. We certainly have seen payers ramp up the intensity level of their denial activities over the past several years. But given our focus and investment in these areas, we've been able to moderate the rate of growth in denial write-offs this year from prior year. So denials were not a material impact to HCA in third quarter of 2024. A quick update on the Medicare Advantage to Midnight Rule adoption. Our same facility total Medicare admissions increased 5.3% in the quarter. Traditional Medicare admits were basically flat. Medicare Advantage admissions were up 11%. And we attribute approximately 2% of that 11% growth in Medicare Advantage admissions coming from the two midnight rule impact. This is equivalent to approximately 50 basis points of our overall admission growth and has remained consistent over the years, over the year. As we continue, as I think about the denial impact to your question on the two midnight rule, we do continue to see a modest reduction in the prior authorization denial trends for accounts with two midnights or greater compared to prior year so far in 2024. But we still have way too many denials. And we have a few large Medicare Advantage payers that are significant outliers driving these denials. For context, let me highlight a couple of the comparisons of Medicare Advantage to traditional Medicare. Medicare Advantage now represents 58% of total Medicare volume. The mix of observation to inpatients with Medicare Advantage is still significantly higher than traditional Medicare, even now nine months past the implementation of the two midnight rule. Lastly, the Medicare Advantage CMI adjusted length of stay ratio is approximately 10% higher than traditional Medicare, driven by payer-driven discharge delays. These drive cost burdens to providers. So as we're working with our Medicare Advantage payers, we're really trying to address two things. We're trying to address this denial burden and the cost burden. And so as you think about the adjudication process, we are starting to get through the first quarter's denials all the way through the adjudication process. And now we are pursuing those through dispute resolution. As we talked about before, dispute resolution can take a year to two years to fully complete. And so we are going to have to continue to pursue that strategy as we move forward.
Greg Headenbeck
Morgan Stanley
Thanks for the color.
Jeremy
Host
Our next question comes from the line of Sam Hines from Mizzou. Please go ahead.
Anne
Mizzou
Hi, this is Anne. Thank you. I guess part of my question you just addressed, when I think about pricing assumptions for 2025, when I think ahead, I'm assuming it might be a tough compare because you have this two midnight rule this year. You also had a nice shift from Medicaid to commercial next year and had some incremental DPP. So when we think of pricing next year, maybe in your initial guide, what do you have for maybe a benefit for continued shift to this observation to inpatient status on the Medicare Advantage side and maybe any incremental DPPs that you have included in your initial guide because I know some states are working behind the scenes to get more programs approved. Thank you.
Mike Marks
CFO
Hi, Anne. Let me say this. It's a little early to give a lot of details around 2025 and as we finish our planning process, uh in in in january call we'll give you you know all of those details i would say this though largely i think our cash net revenue per adjusted addition we're planning on somewhere between two to three percent growth uh in in 2025 and that's our that's our early look at that at that metric in terms of payer contracting i don't know if this is exactly where you're going but i'll go ahead and give you the update that we're now 80 percent complete uh in 2025 54% complete for 2026 and just short of 20% complete for 2027. And we're still tracking in that mid-single-digit update. So that's a quick update on the commercial side.
Jeremy
Host
Our next question comes from the line of Pito Cheekering from Deutsche Bank. Please go ahead.
Pito Cheekering
Deutsche Bank
Hey, thanks for taking my question. So tagging on there, sort of two questions here on pricing next year. Do you assume any DBPs in that guidance range that you gave us for next year? And then as you think about labor and OPEX, I guess, what do you guys assume for labor and OPEX within that guide for next year? Thanks so much.
Mike Marks
CFO
So, yeah, I would repeat that really we'll be getting into the details of our margin profile assumptions for 2025 when we have our January call, still in the middle of our planning process, a little early to be getting into those details now for third quarter. And so let me just stay there related to that. I'm happy to give you a quick waiver update, though, for third quarter. And so I'll do that here. You know, as we've noted before, Medicaid has historically been our most challenging payer, other than patients without insurance. The growth in the Medicaid supplemental payment programs across our states over the past several years have helped. But these programs are complex and variable from quarter to quarter, and when taken together with historical Medicare reimbursement, are still short of covering the cost to treat Medicaid patients. This quarter really illustrates the complexity and variability of these programs. As noted in my comments, Medicaid supplemental payment programs produced a modest benefit in the quarter versus prior year. This modest benefit was generally the net effect of a reduction from the Florida program, given our change to accruing, as offset by receiving the North Carolina benefit in third quarter of 24 versus fourth quarter of last year, and then the new Nevada program that kicked in this year. We still project that we will have $100 million to $200 million tailwind from Medicaid supplemental payment programs in 2024 to prior year, but would now lean to the higher end of that range.
Sam Payson
CEO
Mike, let me just add something. I think, as I mentioned in my comments, that we anticipate a stable operating environment for 2025. suggest demand sort of in the zone as we talked about, which is better than our long-term assumptions around demand. Mike just spoke to our pricing and reimbursement environment being generally consistent and sort of programmed for 2025. And then with respect to our costs, we do think, you know, inflationary trends are generally consistent with what we've seen on the labor side for 2024. And we have reasonable assumptions around the rest of our costs to be somewhat stable and in line with, you know, sort of 2024. Now, we're putting a finer point on that as we finish the year and land on a few things. So that's how we're characterizing a stable operating environment. Great. Thanks so much, guys.
Jeremy
Host
Our next question comes from the line of Andrew Mock from Barclays. Please go ahead.
Andrew Mock
Hi, good morning. Looks like there was a deceleration in inpatient revenue per admission from 6.5% in the first half of the year, which was very strong, to about half of that in the third quarter. I just want to understand the underlying drivers there between acuity, mix, and rate. Thanks.
Mike Marks
CFO
So when I think about the NRA growth rate in third quarter versus kind of year-to-date or the first half of the year, as you note, really all of the decline in the growth rate is driven by state supplemental programs. We had growth in Medicaid supplemental program revenues in third quarter of 24 to prior year, but well below the growth rate in the first half of 2024 to prior year. Consistent with the first two quarters of 2024, we had good growth in acuity and strong payer mix in the quarter.
Andrew Mock
Great. Thanks for the call.
Jeremy
Host
Our next question comes from the line of Joanna Gadget from Bank of America. Please go ahead.
Joanna Gadget
Tendai Woitocka- hi good morning, thanks so much for taking that question here, so maybe I guess on the payer makes a little bit additional question here in terms of the exchange volumes and then medicaid volumes in the quarter, I guess, you gave us. Tendai Woitocka- A medicare so also commercial volume growth in the quarter, so maybe I can kind of give us a additional I guess data points on the payments and the volume growth in the quarter by payer Thank you.
Mike Marks
CFO
Sure. Good morning. So I'm going to use equivalent emission growth in third quarter of 24 to prior year, same facility. And so let's run down the Medicare up 5% on equivalent admissions, Medicaid down 8.5% on equivalent admissions, managed care volume excluding exchanges up just short of 4%, The exchange volume was at 43% growth, same facility to prior year. And then uninsured volumes were up 7.2%. So that equates to that total of 4.5% growth in equivalent emissions in the quarter.
Jeremy
Host
Our next question comes from the line of Austin Gervak from Wolf Research. Please go ahead.
Justin Lake
Wolf Research
Wow, that's a name from the past. um it's justin lake from wolf thanks uh the wanted to ask about uh the uh long-term debt and uh you know your leverage and how you're thinking about that going into next year looks like you're kind of ending the year around three times and then uh i apologize i know i missed a little bit of the uh of the beginning of the fall but i know you got asked about the uh the hurricane impact in there but anything you uh that i might have missed in terms of uh how you're thinking about the hurricane and the potential it reoccurs next year within your guidance or your your you know high uh that you're six percent are you how are you thinking about that 300 million thanks
Mike Marks
CFO
Great, Justin. So as it relates to cash flow, we had a really strong quarter in third quarter 24. We did end right at the lower end of the range on our leverage target. We've talked about this before, but every year at this time as part of our planning and budgeting process, we're working with our finance investment committee and doing an evaluation of financial policies and we'll announce any any changes to those if there are any on our first quarter call. So we're still in the middle of that planning process related to those kinds of financial policies. But we are at the bottom of that leverage ratio. And, you know, what we articulated related to the 2025 in hurricanes is just that, you know, we generally believe that the ongoing effects of the hurricanes in 2025, which we think are going to be manageable, are primarily in our North Carolina markets. as our Tampa facility will be operational by the end of the year. We did take that into account, Justin, when we crafted our early look comments at being near or slightly above the upper end of our long-term growth ranges. And as always, we'll give you a lot more details and context around our 25 look when we do formal guidance update in January.
Justin Lake
Wolf Research
Thanks.
Jeremy
Host
Our next question comes from Brian Turklet from Jefferies. Please go ahead. Hey, good morning.
Brian Turklet
Jefferies
Mike and Sam, as I think about the work that you're doing with the communities and disruption, how are you thinking about insurance claims or insurance reimbursement that then maybe Mike, just any color you can share on the change to the CapEx guidance? Sure.
Mike Marks
CFO
Let me write that down. So on on insurance, Yeah, and we noted this in our release. The impacts that we've noted related to fourth quarter and third quarter did not include any estimate related to insurance recoveries at this point. You know, it's still early. We're working through that now. We do anticipate having insured losses related to these hurricanes coming. It's a little early yet, and we're really not in a position to provide an estimate either to the timing of a potential recovery or the amount, but we do believe that there will be a claim for sure given the size of these storms. Related to the change in CapEx, it's really just the timing of capital projects. You know, these are especially the bigger projects, as you know, take a long time, and the timing can flow a little bit up and down. But there's no implication there. We're still seeing a lot of really good opportunities to invest in our business. And so I would just articulate the slight decrease in what we think we're going to spend this year on CapEx being related more to timing.
Jeremy
Host
Thank you. Our next question comes from Whit Mayo from SEP Securities. Please go ahead.
Whit Mayo
SEP Securities
Hey, thanks. Sam, you've had a big focus on the AI and technology investment. Just wondering if there's any new learnings, any efficiencies that you guys are seeing from those investments, maybe around labor management or other areas that you can share that you find encouraging. That would be helpful. Thanks.
Sam Payson
CEO
So we yesterday actually presented our full plan on our digital agenda. and how we are approaching advancing technology and, in particular, AI into the company's business over the next five to seven years. And we see many opportunities to improve our administrative functioning, our operational management of our business, and then ultimately the clinical outcomes for our patients. And so we're early in that journey. We do have some areas where we're seeing promising results as it relates to using technology and, in particular, artificial intelligence more effectively. Some of that is in our scheduling capabilities. where we've been able to improve the tools that our managers can use with more precise demand forecasting, better allocation of our workforce to meet the patient demands and such. So that's encouraging and giving us a little bit of confidence. We have aspects of artificial intelligence embedded into our revenue cycle, as Mike mentioned, to manage the receivables performance. and the revenue performance of the company more effectively and mitigate some of the denial pressures and so forth. So those are early stage initiatives that are yielding positive results for us. They're not material yet, but we do see a growing set of initiatives. We're organizing around the agenda. We're going to be resourcing it even more as we push into the next few years, and we expect to get incremental improvements in 25 and 26 and on into the rest of this decade as we mature our efforts on this particular front. I mean, it's our view that we're at an inflection point. HEA healthcare historically has performed at high levels. across all elements of our business, I believe. Obviously, our growth has been good. Our margin performance has been good. Our clinical outcomes and quality performance to date is better than it was in 2019, so pre-pandemic. So now we've improved our overall quality. And then with respect to our constituency engagements, employees, physicians, and even community, we've advanced that. So we're at this incredible inflection point because of these tools. And in our business, we see a lot of application. And so we're very excited about the potential that this particular agenda presents for our company.
Jeremy
Host
Thanks. Our next question comes from Stephen Baxter from Wells Fargo. Please go ahead.
Stephen Baxter
Wells Fargo
Hey, thanks for the question. I just wanted to ask about the volume growth assumption for next year. Is it the 3 or 4 percent? But I was looking back at last quarter, I think you suggested the exchange is potentially worth as much as, you know, maybe 200 or 250 basis points of your growth this year. Just trying to understand how you're thinking about, you know, some of these unusual coverage dynamics in the exchanges. And I guess for Medicaid, you know, that's a headwind this year. Does it keep declining as you think about, you know, next year? Is that stabilized? Just trying to understand some of these more, like, macro-driven dynamics inside your value assumption. Thanks.
Mike Marks
CFO
Yeah, great question. You know, largely, I think exchange enrollment will moderate next year. You know, maybe in the 8% to 10% growth in enrollment is the best estimates we have versus in our states this year, You know, enrollment growth was over 30%, so that's one factor, certainly. I do think that Medicaid volumes will flatten out a bit in 25 versus 24 as we kind of sunset through the Medicaid redetermination process. So, you know, largely I would say those are the two biggest dynamics. I think the net effect of that will be generally stable payer mix as we move from 2024 to 2025.
Jeremy
Host
Our next question comes from Scott Fidel from Stevens. Please go ahead.
Scott Fidel
Stevens
Hi, thanks.
Jeremy
Host
Good morning.
Scott Fidel
Stevens
I'm interested if you can update us on the contracting environment and with Medicare Advantage plans, just separate from the two midnight rule dynamic and sort of how those trends have been playing out as some of the MA plans, or a lot of them have been experiencing a lot of pressure on their rates and margins as well. And then just a quick follow-up, just around the 25, preliminary outlook understanding it's only early. Would there be any view on any impact on the cadence of EBITDA just around the impact from the hurricanes and the timing of recovering from that? Thanks.
Mike Marks
CFO
Let me cover the contracting piece, and then we'll jump to your second question. You know, generally speaking, we're largely contracted across the major Medicare Advantage payers, and as we've done our normal kind of set of renewals in 2024 we've been able to come to agreement with our payer partners in the medicaid medicare advantage space that is our intention to continue to do that you know we continue to work with our medicare advantage payer partners to work through the challenges that they have and that we have as a provider in their contracted network. But in terms of contracting, I would say that we are fairly consistent with where we've been in the past, which is largely contracted, and we've been able to secure renewals as we've gone through our 2024 renewal cycle. In terms of cadence of EBITDA, again, I think it's a little early to get into trying to to think about earnings by quarter in 2025 at this point. So I'll push that answer to when we come together in January.
Jeremy
Host
Our next question comes from Brian Langston. Please go ahead.
Brian Langston
Morgan Stanley
Hi, good morning. I mean, hurricanes are just kind of a fact of life in the southern states, typically not as severe, of course, as this year. But you did see some effects a couple of years ago. I don't think you'd be overly reactive to this, but does this maybe cycle of hurricane activity do anything to affect sort of long-term strategy on capital allocation, M&A, in terms of building buying facilities, and maybe look outside of those geographies, even if only maybe somewhat incrementally? Thanks.
Sam Payson
CEO
This is Sam. I think the short answer to that is no. We have seen... Our facilities, as I mentioned in my comments, recover. I'll just give you an example. Hurricane Ian, which affected our hospital in Port Charlotte, HCA Fawcett Hospital, a couple of years ago, that hospital was actually repaired, hardened, if you will, to hurricanes, and we're actually performing at a higher level than we were pre-Hurricane Ian. Hurricane Michael, which hit Panama City, Florida, also has been repaired significantly and hardened some as well. Obviously, a hurricane could hit it again and damage it, but that hospital is performing at a higher level than it was pre-storm. Hurricane Harvey, which hit Houston a number of years ago and was a significant flood event as a result, our Houston system has recovered and is also exceeding pre-Harvey performance as well. So we still believe that the state of Florida, the Gulf Coast of Texas and so forth, are very significant opportunities for our company. We invest, we believe, wisely in those communities. We harden our facilities as much as we possibly can. But they are, in fact, a way of life. I will tell you, this year, and I had personal experience investing with Katrina is very similar to the effects of Katrina. I mean, Hurricane Helene was a Category 4 storm. And if you would have asked me what two communities were most impacted, I would have never said in 100 years Augusta, Georgia, and Asheville, North Carolina. And so we dealt with an unprecedented storm. And again, HCA, we showed the power of the company, I think, but more importantly, the power of its people to respond to that. And I think we're going to be stronger as a result of it in those markets. We believe that our portfolio of communities that we serve are very well positioned for long-term growth, as we've indicated. We understand the risk associated with hurricanes. That's why we've built the capabilities that we've got, and we think we're diversified enough across those communities to deal with that particular risk.
Brian Langston
Morgan Stanley
Okay. Thank you.
Jeremy
Host
Our next question comes from the line of Sarah James from Cantor Fitzgerald. Please go ahead.
Joanna Gadget
Bank of America
Thank you. Outpatient surgical trend remained negative despite a lower comp. In your 4Q and 25 guide, do you assume that stabilizes or turns positive? What's driving that pressure? And then just a quick clarification on the business interruption insurance comment that you made, what level of insurance do you carry? Thanks.
Sam Payson
CEO
So on outpatient surgery, as we indicated, nothing's changed from the trends we've seen this year. The declines have been focused almost entirely in Medicaid and uninsured. That's why our revenue per surgical case has been up 7%. We've seen acuity growth, and we've also seen payer mix improvement. in our outpatient surgery. The profitability of our outpatient surgery service is better as a result. So on the headline, volume is down. On the bottom line, profits are up with respect to outpatient surgery. So we're comfortable with that outcome. As it relates to next year, we don't anticipate any significant changes at this particular juncture. We believe our overall volume guidance includes the different categories that we've got. Our efforts on outpatient surgery continue to advance. We're advancing the number of surgery centers that we have in our company through greenfield development as well as some targeted acquisitions. And we continue to improve the operations of our hospital-based outpatient surgery centers, providing better environments for our physicians and better care environments for our patients.
Mike Marks
CFO
And on your insurance question, we certainly have business interruption coverage as part of our property insurance program. But at this time, we're really not in position to provide estimates related to either the timing or the potential recovery under those insurance policies or the limits thereof. So that's where we are now.
Jeremy
Host
Our next question comes from the line of John Ransom. Please go ahead.
John Ransom
Unknown
Hey, good morning. Just kind of backing up. I'm trying to think about things that we worried about five years ago that we don't talk about anymore. One thing that comes to mind is value-based care and all that stuff. And I'm just curious, your commercial contracts in particular, I know they're fee-for-service, but what kind of kickers do you get in 2024 for things like possible acquired infections, readmissions, other quality metrics? What kind of kickers are you getting now versus then? Have they grown? And what are some examples of that? Thanks.
Sam Payson
CEO
John, this is Sam. Those are, you know, very... incremental inside of our overall revenue contracts with payers and I won't say they're de minimis but they're not material to the overall escalators that we have or the overall revenue equation inside of those contracts we have a Some contracts that have modest provisions around those, but when you aggregate it for the company as a whole, it's a very small component of the escalators that we get. I mean, we are committed at our core to providing better care to our patients, and that's part and parcel to why our quality outcomes, as I mentioned, are better than they were in 2019. And we have a robust agenda across the organization to improve the outcomes for our patients, including some of the benefits the service metrics that you referenced there. So that's sort of core to how we approach it. And it's embedded, I think, in the offering of HCA facilities to payers and their members. And that's allowed us, we believe, to get to a point where it We contract on a pretty consistent cycle. We've actually advanced the number of commercial contracts this year that we participate in with two major contract signings, Kaiser in Denver And then Blue Cross of Tennessee and Chattanooga. So we have very few commercial contracts across the country now where we don't participate. It's less than a handful. And we think that's a result of our access capabilities with our outpatient platform as well as our quality and comprehensive service offerings that we provide back in our facilities.
John Ransom
Unknown
If I could just tag on, when you define quality, I know that's an amorphous concept to some people, but what's the dataset that you use and how has that changed? Thanks. I'll ring it off now. Thank you.
Sam Payson
CEO
I mean, I don't know that we have enough time on this call, John, to talk about the dataset that we have around quality. I mean, we have an increasing dataset around quality. We have better insights into it as an organization. It includes everything from complications to mortality, to hospital-acquired infections, to length of stay, to a specific service line metrics for cardiovascular care, for bone marrow transplant, for ER processing, as I mentioned before. I can go on and on about it. We have a very integrated quality agenda with our leadership corporately and with our hospital teams, and all of that comes together in an advanced state for us as an organization. As we think about AI and the question that Witt asked earlier, we see that as the next frontier, allowing us to get even better at it, more efficient, and more transparent. So it's really a fairly comprehensive program that we've continued to grow simply because our service offerings are more complex Our ability to use our quality to attract physicians and patients and be more responsive to our communities is just, you know, sort of core to what we do day in and day out.
Jeremy
Host
Our next question comes from the line of Lance Wilkes from Bernstein. Please go ahead.
Lance Wilkes
Bernstein
Great. Can you talk a little bit about some of the improvements you've been seeing in your wage and compensation expense ratio? In particular, what sort of wage inflation you're seeing currently in your contracting with nurses, et cetera? What your growth rates are looking like there? And then maybe just a quick cleanup. If you could just talk a little about bad debt impacts you're seeing as a result of Medicaid redetermination, that'd be great, too. Thanks.
Mike Marks
CFO
So, you know, generally speaking, as we've come through this year, you know, the wage rates that we're seeing across our markets are generally pretty stable. You know, I think we've remarked before somewhere between the two and a half, three and a half percent range is about kind of what we're seeing. And, you know, if I think about for next year, as Sam mentioned, you know, we're anticipating and planning for a fairly stable operating environment, including wage inflation. So that would be the wage part of that. On bad debt impacts, you know, as we noted, I would use just the volume as an example. But, you know, if you think about the uninsured volume growth for equivalent admissions in the quarter at about 7%, we give you a sense of that. But in terms of bad debt or uninsured costs, you know, it's pretty stable. And, you know, we don't anticipate significant changes to the stability as we go into next year.
Jeremy
Host
Great. Thanks. Our next question comes from the line of Greg Headenbeck from Morgan Stanley. Please go ahead.
Greg Headenbeck
Morgan Stanley
Thanks. Mike, can you touch on just the resiliency program of 600 to 800 million savings? Just how are you thinking about that in 2025 and beyond from a timing perspective?
Mike Marks
CFO
Yeah, good question. As I think about resiliency, you know, we continue to see good output from the results of our work around our resiliency program. You know, a few points of that would be, one, the link stage and our case management agenda. where this year we've seen about a 1.5% reduction in our length of stay this year, which has been very helpful as we've managed both our labor and our capacity as we've gone through this year and accommodated additional volume growth. Labor management, which we've just talked about as we've gone here through the third quarter, our resiliency actions have allowed us to show margin improvement in labor and And it really kind of contributes to, as we think about 25 and beyond, using this resiliency program to help fund and support the investments that we're making in our tech and innovation programs and still allow us to produce good returns to our global set of stakeholders. So generally speaking, I'd say we're on track. And as we noted in Investor Day, you know, the next two or three years here are going to be largely using our resiliency to program to pay for tech and innovation investments. And then as we kind of move deeper into the decade, you know, to support our margins and deal with the challenges that may come. But I'm pleased with the current status and the trajectory of our overall resiliency program. And that would be a status update that I would give for now.
Greg Headenbeck
Morgan Stanley
Got it. And then just a quick follow-up on professional fees leveling off on a sequential basis. Do you expect that to be stable in 2025 as well?
Mike Marks
CFO
Well, you know, it's, again, a little early to be given that level of detail for 25. Clearly, we are pleased and encouraged with the work that our operating and our physician services teams have been doing to deal with the pressures, and really specifically in the hospital-based physician world. you know, as you kind of walk through the quarters this year, you know, our first quarter grew 20% to prior year. Our second quarter grew 13% to prior year. And now in third quarter, we're down to 10. And we were able to keep that growth, you know, fairly sequential from second to third quarter. I do think given what we're seeing in the results of our work that, you know, that's part of Sam's comment for next year of a stable operating environment. And so I think that I would, for now, until we get to January, I would largely articulate the profi environment in that same concept.
Jeremy
Host
Our next question comes from the line of Jamie Pearse from Goldman Sachs. Please go ahead.
Jamie Pearse
Goldman Sachs
Hey, thank you. Good morning. I was just looking for a Valesco update. What's the status of losses in the third quarter? Where are you in turning around that enterprise and getting improved pricing there? And just what are your latest thoughts on timing of when you can get that to breakeven or potentially profitable. Thank you.
Sam Payson
CEO
This is Sam. On Valesco, we're pleased with the integration that's happened this year. We were able to assimilate, as we've mentioned before, 5,500 physicians from that particular group into HCA management systems. and so forth. Our objectives with Valesco are to get it to an appropriate level of financial performance. This year, we are in fact on our plan, maybe slightly ahead of it, but it's not material to the company as a whole. Our long-term objectives with Valesco are to create an internal capability with this particular physician group that basically turns this into a strategic asset. And by that, I mean we have the ability to improve our clinical outcomes and quality results for our patients because we have a physician group that is fully integrated as an employee base inside of HCA. We can build more rigor, more routines, more standards in how we do clinical processing. The second thing we think we can accomplish in our journey to make it a strategic asset is to improve efficiency, embed these physicians more into how we manage our emergency rooms, how we execute on our case management agenda, and so forth. And then thirdly, we think we can leverage this group to help us with our tech agenda, to help us with our growth agenda by building relationships with referring physicians, and help us with outreach. So those aspects of value creation that we see with Valesco far exceed sort of the financial performance inside the group. We continue to improve our reimbursement with the payers as it relates to hospital-based physicians. but these other elements provide more value, we think, globally to the organization and will be part and parcel to our core initiatives. Okay, Jeremy, we'll take one more question.
Jeremy
Host
All right, perfect. Our last question comes from the line of Joshua Raskin from Nefron. Please go ahead.
Joshua Raskin
Nefron
Hi, thanks. Good morning. So I heard Medicaid adjusted admissions were down 8.5% in the quarter. It's actually... not as big as the decline in total Medicaid lives in the market. So I'm curious if these additional state subpayments and sort of broad increases to Medicaid funding has impacted strategy around serving Medicaid patients. Are you thinking differently about capacity or service lines to Medicaid specifically?
Sam Payson
CEO
Josh, this is Sam. Actually, no, the contrary. We are finding opportunities to improve offerings for Medicaid beneficiaries through some of our outpatient development in certain markets, the supplemental payment programs that Mike has alluded to over the past. have created reimbursement in some situations where it makes it easier for us to invest in services and capabilities that help the Medicaid beneficiaries and produce better environments for them to get care. So I don't see that anything has changed our core thinking around how we provide available services to that particular beneficiary, and we'll continue to evaluate that. I think for HCA as a whole, 17-18% of our adjusted admissions are Medicaid So it's a large piece of our organization. The decline this year is really centered around redeterminations mostly, not funding from one state to the other. It was through that process of redetermination that some of the business moved amongst the payer classes, as we've indicated, over the year. that will slow down because we don't have a redetermination process next year, and we will continue to evaluate how to use our investments to properly allocate to meet the needs of our communities broadly, and in some cases, specifically for Medicaid.
Jeremy
Host
All right. That is all the questions in the queue, so I'll turn it back over to Mr. Frank Morgan for closing remarks.
Frank Morgan
Vice President of Investor Relations
Jeremy, thank you for your help today, and thanks to everyone for joining our call. Hope you have a great weekend. I'm around this afternoon. If I can answer additional questions, you might have. Good day.
Jeremy
Host
That does conclude today's conference. Have a pleasant day, everyone.
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