HCA Healthcare - Q3 2024

Executive Summary

• Q3 revenue was $17.487B (+7.9% YoY) with diluted EPS $4.88 (includes ~$0.15/share negative impact from Hurricane Helene); Adjusted EBITDA rose to $3.267B (+13.4% YoY) and margin expanded 90 bps YoY to 18.7%.
• Volumes were broad-based: same-facility admissions +4.5%, ER visits +4.6%, inpatient surgeries +1.6%; outpatient surgeries fell 2% but revenue mix/acuity offset on profitability.
• Guidance reaffirmed for FY24 (revenues $69.75–$71.75B; Adj. EBITDA $13.75–$14.25B; EPS $21.60–$22.80) with management now expecting results in the lower half due to hurricane impacts; FY24 capex trimmed to ~$5.0B (timing).
• Initial 2025 outlook: diluted EPS and Adjusted EBITDA growth “near or slightly above” the upper end of long-term ranges; management assumes volume growth 3–4% and a mostly stable operating environment.
• Incremental Q4 headwind from Helene/Milton estimated at $200–$300M (or $0.60–$0.90/share) excluding any insurance recoveries; dividend declared at $0.66/share payable Dec 27, 2024.

What Went Well and What Went Wrong

What Went Well

• Broad-based volume strength drove 7.1% same-facility revenue growth, with payer mix and acuity tailwinds; CEO emphasized the “HCA Way” in operational execution and disaster response: “Leveraging corporate capabilities effectively to support committed people in our facilities is fundamentally our formula for success. We call it the HCA Way”.
• Labor efficiency improved: labor costs as % of revenue improved 160 bps YoY; contract labor costs -18% YoY and now 4.6% of total labor cost; adjusted EBITDA margin +90 bps YoY to 18.7%.
• Early AI initiatives showing promise (scheduling, revenue cycle) with a multi-year roadmap to drive administrative and clinical efficiencies; complemented by new ambient AI partnership with Commure to deploy at scale.

What Went Wrong

• Hurricanes Helene/Milton: ~$50M Q3 impact (~$0.15/share) and expected Q4 impact of $200–$300M (~$0.60–$0.90/share), primarily NC and HCA Florida Largo; insurance recoveries not yet estimated.
• Outpatient surgery volumes declined 2% (same-facility), with weakness concentrated in Medicaid/uninsured; however, revenue/case ↑7% and profitability improved due to mix/acuity.
• Other cost pressures: supply cost as % of revenue +30 bps YoY; other operating costs +40 bps YoY (Medicaid supplemental accruals; hurricane-related repairs); professional fees +10% YoY (but flat sequentially vs Q2).

Transcript

Operator (participant)

Hello, welcome to the HCA Healthcare Q3 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 (VP of Investor Relations)

Good morning, and welcome to everyone on today's call. With you, with me this morning is our CEO, Sam Hazen, 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 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.

Sam Hazen (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 the 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 HCA 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 H1 of the year, the results for the Q3 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 $0.15 per share from lost revenue and additional expenses caused by hurricanes.

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 aftereffects 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 Q4, in addition to losing revenue. 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 acute 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 helped 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 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 twenty twenty-five. 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 the range of 3%-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 are pleased with the Q3. We produced good volume growth and margins, especially when considering the impact of the hurricanes. I will 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 twenty-sixth 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.

City potable water supply is not projected to be reestablished at Mission Hospital for several more weeks. As Sam noted, we estimate that Hurricane Helene impacted the Q3 by $50 million or $0.15 per diluted share. Hurricane Milton hit the west coast of Florida, just south of Sarasota, on October ninth, 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-$300 million or $0.60-$0.90 per diluted share during the Q4 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 continued to see good results on contract labor, which improved 18% from the prior year and represented 4.6% of total labor cost. 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 Q2. We had expense growth associated with Medicaid supplemental payment programs, and we had increased repair and maintenance costs related to Hurricane Helene. Medicaid supplemental payment programs provided a modest benefit to our Q3 twenty-four 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 (VP of Investor Relations)

Thank you, Mike. As a reminder, please limit yourself to one question so we might give 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.

Operator (participant)

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 A.J. Rice from Credit Suisse. Please go ahead.

Joshua Raskin (Analyst)

Thanks. Hi, everybody. Just maybe one point of clarification, then a question. So on the outlook comments for 2025, if we take the midpoint of your 2024 guidance, $14 billion, and take $250-$350 million of hurricane impact off of that, and then grow at the high end of your 4%-6% range, we'd come up with something like $14.6 billion for 2025, and then we'd layer in hurricane recovery on top of that. I just wanna 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.

You now have 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 you anniversary what was strong trends last year?

Mike Marks (CFO)

Thanks, A.J. This is Mike. As relates to our twenty twenty-five commentary, let me say this: You know, we generally believe that the ongoing effects of the hurricanes in twenty twenty-five, which, as Sam said, we think are manageable, will be primarily in North Carolina, as we expect our campus facility to be operational by the end of twenty twenty-four. And we took these storms and the potential lingering effects into twenty twenty-five into account when we set this being near or slightly above the upper end of our long-term growth ranges. As Sam noted as well, we will give much more context and details on our twenty-five formal guidance in January.

As it relates to volume, you know, the only thing I might point, you know, 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%, and that sequential increase is in line with our past sequential trends. So, that, that's our sense of volume.

Sam Hazen (CEO)

And let me add to that, A.J., broadly, most of our service categories are growing, 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.

Operator (participant)

Our next question comes from the line of Ben Hendrix from RBC Capital. Please go ahead.

Joshua Raskin (Analyst)

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 Q3 of twenty twenty-four. 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 fifty basis points of our overall admission growth and has remained consistent over the years, over the year. As we continue, as 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, you know, through the Q1's denials, through all the way through the adjudication process, and now, we are pursuing those through dispute resolution.

As we've talked about before, dispute resolution can take a year to two years to fully complete, and so we are gonna have to continue to pursue that strategy as we move forward.

Joshua Raskin (Analyst)

Thanks for the color.

Operator (participant)

Our next question comes from the line of Ann Hynes from Mizuho. Please go ahead.

Joshua Raskin (Analyst)

Hi, this is Ann. Thank you. Part of my question you just addressed, when about pricing assumptions for 2025, when 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 we'll as we finish our planning process, in January call, we'll give you, you know, all of those details. I would say this, though: largely, our cash net revenue per adjusted admission, we're planning on somewhere between 2%-3% growth, in 2025, and that's our early look 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% complete, 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.

Operator (participant)

Our next question comes from the line of Pito Chickering from Deutsche Bank. Please go ahead.

Joshua Raskin (Analyst)

Hey, thanks for taking my question. Tagging on there, two questions here on pricing next year. Do you assume any DPPs in that guidance range that you gave us for next year? As you think about labor and OpEx, What are you guys assuming for labor and OpEx within that guide for next year? Thanks so much.

Mike Marks (CFO)

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 Q3, and so let me just stay there related to that. I'm happy to give you a quick labor update, though, for Q3, 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 Q3 of 2024 versus Q4 of last year, and then the new Nevada program that kicked in this year.

We still project that we will have a $100 million-$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 Hazen (CEO)

Mike, let me just add something. Pito, as I mentioned in my comments, that we anticipate a stable operating environment for 2025, that suggests demand, 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 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, 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.

Joshua Raskin (Analyst)

Great! Thanks so much, guys.

Operator (participant)

Our next question comes from the line of Andrew Mok from Barclays. Please go ahead.

Joshua Raskin (Analyst)

Hi, good morning. Looks like there was a deceleration in inpatient revenue per admission from 6.5% in the H1 of the year, which was very strong, to about half of that in the Q3. I just want to understand the underlying drivers there between acuity, mix, and rate. Thanks.

Mike Marks (CFO)

So when about the NRA growth rate in Q3 versus year to date or the H1 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 Q3 of twenty-four to prior year, but well below the growth rate in the H1 of twenty twenty-four to prior year. Consistent with the first two quarters of twenty twenty-four, we had good growth in acuity and strong payer mix in the quarter.

Joshua Raskin (Analyst)

Great, thanks for the color.

Operator (participant)

Our next question comes from the line of Joanna Gajuk from Bank of America. Please go ahead.

Joshua Raskin (Analyst)

Hi, good morning. Thanks so much for taking my question here. So maybe on the payer mix, a little bit, additional question here in terms of the exchange volumes and the Medicaid volumes in the quarter. You gave us Medicare, so also commercial volume growth in the quarter. So maybe I can kinda give us additional, data points on the payer mix and the volume growth in the quarter by payer. Thank you.

Mike Marks (CFO)

Sure. Good morning. So I'm gonna use equivalent admission growth in Q3 of twenty-four 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, to prior year, and then uninsured volumes were up 7.2%. So that, that equates to that total of 4.5% growth in equivalent admissions in the quarter.

Operator (participant)

Our next question comes from the line of Austin Gerlach from Wolfe Research. Please go ahead.

Justin Lake (Analyst)

Wow! That's a name from the past. This is Justin Lake from Wolfe. Thanks. Wanted to ask about the long-term debt and, you know, your leverage and how you're thinking about that going into next year. Looks like you're kinda ending the year around three times. And then, I apologize, I know I missed a little bit of the beginning of the call, but, and I know you got asked about the hurricane impact in there, but anything that I might have missed in terms of how you're thinking about the hurricane and the potential it reoccurs next year within your guidance or your, you know, high, the year 6%? 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 Q3 of twenty-four. We did end right at the lower end of the range on our leverage target. And 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 changes to those if there are any in our Q1 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.

You know, what we articulated related to the twenty twenty-five in hurricanes is just that, you know, we generally believe that the ongoing effects of the hurricanes in twenty twenty-five, which we think are going to be manageable, are primarily in our North Carolina market.

Sam Hazen (CEO)

... 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 2025 look when we do formal guidance update in January.

Justin Lake (Analyst)

Thanks.

Operator (participant)

Our next question comes from Brian Tanquilut from Jefferies. Please go ahead.

Joshua Raskin (Analyst)

Hey, good morning. Maybe Mike and Sam, as about the work that you're doing in the communities and the disruption, how are you thinking about insurance claims, or insurance reimbursements that you've got? And then maybe Mike, just any color you can share on the change to the CapEx guidance.

Mike Marks (CFO)

Sure. Let me write that down. So on insurance and we noted this in our release, the impacts that we've noted related to Q4 and Q3 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. 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 gonna spend this year on CapEx being related more to timing.

Joshua Raskin (Analyst)

All right. Thank you.

Operator (participant)

Our next question comes from Whit Mayo, from SVB Securities. Please go ahead.

Joshua Raskin (Analyst)

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'd be helpful. Thanks.

Sam Hazen (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, you know, 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 twenty-five and twenty-six and on into the rest of this decade as we mature our efforts on this particular front. It's our view that we're at an inflection point.

HCA 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 to 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.

Joshua Raskin (Analyst)

Thanks.

Operator (participant)

Our next question comes from Stephen Baxter from Wells Fargo. Please go ahead.

Joshua Raskin (Analyst)

Hey, thanks for the question. I just wanted to ask about the volume growth assumption for next year. Is it the 3% or 4%? If I was looking back at last quarter, you suggested the exchanges potentially were 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 for Medicaid, you know, if it's a headwind this year, does it, 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, your volume assumption. Thanks.

Mike Marks (CFO)

Great question. You know, largely, exchange enrollment will moderate next year, you know, maybe in the 8-10% 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 2025 versus 2024 as we kinda sunset through the Medicaid redetermination process. So, you know, largely, I would say those are the two biggest dynamics. The net effect of that will be generally stable payer mix as we move from 2024 to 2025.

Operator (participant)

Our next question comes from Scott Fidel from Stephens. Please go ahead.

Scott Fidel (Analyst)

Hi, thanks. Good morning. Interested if you can update us on the contracting environment and with Medicare Advantage plans, just separate from the two-midnight rule dynamic and how those trends have been playing out as some of the MA plans have, 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 twenty-five preliminary outlook, understanding it's only early. Would there be any view on any impact on the cadence of EBITDA, just around the impacts 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 kinda set of renewals in twenty twenty-four, we've been able to come to agreement with our payer partners in the 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.

So, 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 the EBITDA, again, it's a little early to get into trying to think about earnings by quarter in 2025 at this point. So I'll push that answer to when we come together in January.

Operator (participant)

Our next question comes from Ryan Langston. Please go ahead.

Ryan Langston (Analyst)

Hi, good morning. Hurricanes are just 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 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 Hazen (CEO)

This is Sam. 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, Fawcett, HCA Fawcett Hospital. A couple of years ago, that hospital was actually, you know, 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 and significantly 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 with Katrina, is very similar to the effects of Katrina.

Hurricane Helene was a Category four storm, and if you would have asked me what two communities were most impacted, I would have never said in a hundred 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, but more importantly, the power of its people to respond to that, and we're gonna 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 hurricane and such. That's why we built the capabilities that we've got, and we think we're diversified enough across those communities to deal with that particular risk.

Ryan Langston (Analyst)

... Okay, thank you.

Operator (participant)

Our next question comes from the line of Sarah James from Cantor Fitzgerald. Please go ahead.

Joshua Raskin (Analyst)

Thank you. Outpatient surgical trend remained negative despite a lower comp. In your four Q and twenty-five 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 Hazen (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 you know, better environments for our physicians and better care environments for our patients.

Mike Marks (CFO)

On your insurance question, you know, 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.

Operator (participant)

Our next question comes from the line of John Ransom. Please go ahead.

Joshua Raskin (Analyst)

Hey, good morning. Just kinda backing up, I'm trying to think about things that we worried about five years ago that we don't talk about anymore, and 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, so what kickers do you get in 2024 for things like hospital-acquired infections, readmissions, other quality metrics? What kickers are you getting now versus then? Have they grown, and what are some examples of that? Thanks.

Sam Hazen (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 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. 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.

We have a robust agenda across the organization to improve the outcomes for our patients, including some of the service metrics that you referenced there. That's core to how we approach it. It's embedded, in the offering of HCA facilities to payers and their members. That's allowed us, we believe, to get to a point where 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 in Chattanooga. 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.

Joshua Raskin (Analyst)

If I could just tag on, when you define quality, I know that's an amorphous concept to some people, but what's the data set that you use, and how has that changed? Thanks. I'll ring off now. Thank you.

Sam Hazen (CEO)

I don't know that we have enough time on this call, John, to talk about the data set that we have around quality. We have an increasing data set 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 Whit 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 core to what we do day in and day out.

Operator (participant)

Our next question comes from the line of Lance Wilkes from Bernstein. Please go ahead.

Joshua Raskin (Analyst)

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 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.

Generally speaking, as we, as we've come through this year, you know, our wage rates that we're seeing across our markets are generally pretty stable. We've remarked before, somewhere between 2.5% and 3.5% range is about kinda what we're seeing. And you know that if about for next year, as Sam mentioned, you know, that we're anticipating and planning for a fairly stable operating environment, including wage inflation. So that would be the wage part of that.

Mike Marks (CFO)

On bad debt impacts, you know, as we've noted, I would use just the volume as an example, but you know, if you think about the uninsured volume growth per 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're, we don't anticipate significant changes to the stability as we go into next year.

Joshua Raskin (Analyst)

Great. Thanks.

Operator (participant)

Our next question comes from the line of Craig, Craig Hettenbach from Morgan Stanley. Please go ahead.

Craig Hettenbach (Analyst)

Thanks. Mike, can you touch on just the resiliency program of $600 million-$800 million savings? Just how are you thinking about that in 2025 and, and beyond from a timing perspective?

Mike Marks (CFO)

Good question. As 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 length of stay agenda or case management agenda, where, you know, 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 an additional volume growth.

Labor management, which we've just talked about, as we've gone here through, you know, the Q3, our resiliency actions have allowed us to show margin improvement in labor and it can really kinda contributes to, as we think about twenty-five 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, you know, 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 gonna be largely using our resiliency program to pay for tech and innovation investments.

And then, as we kinda 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.

Craig Hettenbach (Analyst)

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 twenty twenty-five as well?

Mike Marks (CFO)

Well, you know, it's, again, a little early to be giving that level of detail for twenty-five. 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 kinda walk through the quarters this year, you know, our Q1 grew 20% to prior year, our Q2 grew 13% to prior year, and now in Q3, we're down to 10%. And we were able to keep that growth, you know, fairly sequential from second to Q3. I do think, given what we're seeing and the results of our work, that, you know, that's part of Sam's comment for next year of a stable operating environment.

And sothat I would, for now, until we get to January, I would largely articulate the pro fee environment in that same concept.

Operator (participant)

Our next question comes from the line of Jamie Perse from Goldman Sachs. Please go ahead.

Jamie Perse (Analyst)

Hey, thank you. Good morning. I was just looking for a Valesco update. What's the status of losses in the Q3? 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 break even or potentially profitable? Thank you.

Sam Hazen (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, 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 and 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 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.

Operator (participant)

All right, perfect. Our last question comes from the line of Joshua Raskin from Nephron. Please go ahead.

Joshua Raskin (Analyst)

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 supplemental payments and broad increases to Medicaid funding has impacted strategy around serving Medicaid patients. Are you thinking differently about capacity or, you know, service lines to Medicaid, specifically?

Sam Hazen (CEO)

Josh, this is Sam. Actually, no, to 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 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 re-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.

Operator (participant)

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 (VP 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.

Operator (participant)

That does conclude today's conference. Have a pleasant day, everyone.