Q2 2025 Earnings Call Transcript

Ladies and gentlemen, welcome to HCA Healthcare's Second Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir.

Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and our 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, they're based on management's current expectations.

Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA Healthcare, Inc. is included in today's release.

This morning's call is being recorded, and a replay of the call will be available later today. With that, I'll now turn the call over to Sam.

All right. Thank you, Frank, and good morning to everybody, and thank you for joining the call. The company's financial results for the second quarter were strong with a 24% increase in diluted earnings per share as adjusted to $6.84. The results reflected solid revenue growth of 6.4%, which was driven by greater demand for our services, improved payer mix and consistent patient acuity levels. In the quarter, we also experienced a stable operating environment, which allowed us to produce better margins.

Because of the team's great start to the year, we increased our guidance for 2025 as reflected in our earnings release this morning. This updated outlook also reflects the positive demand environment we expect in our markets, the effectiveness of our strategic initiatives and the momentum we see in our business. During the quarter, we also improved quality outcomes, throughput measures in our emergency rooms and patient satisfaction. We believe the HCA way of combining our high-quality local health networks with the capabilities of a national system will continue to reinforce our competitive position, help us respond effectively to evolving market dynamics and meet the needs of our patients.

As a team, we remain relentless in our pursuit to innovate using technology, find new ways to increase efficiencies and hold ourselves accountable for delivering results for our stakeholders. I want to thank our colleagues again for their outstanding work and their ongoing pursuits to deliver on our mission. Now let me transition to the federal policy environment and the recent passage of the One Big Beautiful Bill Act. With respect to the Medicaid component in this act, we believe the adverse impacts over the next few years are manageable.

This belief is based on the grandfathering provisions for supplemental programs, which include a number of previously submitted applications for state-directed payments and the time lines for phasing in work requirements and supplemental payment program changes. I will also note that the bifurcation of the policy between expansion and non-expansion states lessens the expected impact to HCA Healthcare. Approximately 60% of our Medicaid volumes and revenue are in non-expansion states. With respect to the exchange provisions in the Act, we do anticipate that some people will lose insurance coverage over the next few years, but we believe our financial resiliency program should offset these effects.

We are also mindful of the scheduled expiration of the enhanced premium tax credits at the end of this year. We continue to advocate strongly for their extension. But at this point, we do not know what the outcome will be. Recent polling indicates that many Americans want them extended, many believe they need them for their families and many say their voting patterns could hinge on their ultimate fate.

We are working to develop and execute resiliency programs to offset as much as possible any adverse impact should they expire. Let me close with this. Regardless of the outcome with these federal policies, we are optimistic about the future of HCA Healthcare. Our balance sheet is strong.

We have an experienced, capable and disciplined team. And where appropriate, we will adjust as we can and continue delivering on our mission. With that, I'll turn the call to Mike for more details.

Thank you, Sam, and good morning, everyone. We are pleased with our second quarter earnings. Equivalent admissions increased 1.7% for the quarter and 2.3% for the year. Year-to-date managed care equivalent admissions, including the exchanges, grew 4%, which is in line with our expectations.

Medicare grew 3%, which is slightly below our expectation. Medicaid was down slightly and self-pay was up slightly. Both were below our expectations and represent our lowest reimbursing payers. However, given the payer mix and acuity of our patients, we had revenue growth of 6.4%, slightly above the top end of our long- term 4% to 6% guidance.

Adjusted EBITDA margin improved 30 basis points compared to the prior year quarter. Salary and benefits, along with other operating expenses, both improved as a percentage of revenue when compared to the prior year. Same-facility contract labor improved 1% from the prior year quarter and represented 4.3% of total labor costs in the second quarter of 2025 versus 4.6% in second quarter of 2024. Supply expense increased slightly as a percentage of revenue due primarily to increased spending on cardiac-related devices. Adjusted EBITDA in the second quarter grew 8.4% over the prior year quarter, and we were pleased that a substantial portion came from core operations.

Regarding Medicaid supplemental payment programs, as we've said in the past, these programs are complex, variable in timing and do not fully cover our cost to treat Medicaid patients. Considering Medicaid state supplemental payments and related provider taxes in isolation, we saw an approximate $100 million increase in net benefit in the second quarter of 2025 compared to the prior year quarter due to prior period reconciliation payments and program accrual timing. The new Tennessee directed payment program was approved in late June. As this is a newly approved program, we did not accrue any benefit from this program in second quarter of 2025 and will record as we receive cash.

Moving to capital allocation. We continue to deploy a balanced strategy of allocating capital for long-term value creation. Cash flow from operations was $4.2 billion in the quarter. Capital allocation in the second quarter of 2025 was $1.2 billion in capital expenditures, $2.5 billion in share repurchases and $171 million in dividend.

We were able to defer approximately $850 million in tax payments to the fourth quarter due to the IRS providing relief to Tennessee taxpayers in the aftermath of severe weather in early April. Our debt to adjusted EBITDA leverage remains in the lower half of our stated guidance range, and we believe our balance sheet is strong and well positioned for the future. Sam discussed the health policy implications of the One Big Beautiful Bill Act. I will provide a few more detailed notes.

As it relates to tax policy, this act was positive for HCA, making 100% bonus depreciation permanent and effective back to inauguration day, which is helpful given our capital investment program. The act did not include policies that would have materially increased our tax liabilities. We continue our work to develop and execute resiliency plans to offset as much of any adverse impact as possible from the act, the potential expiration of the EPTCs and other administrative actions such as tariffs. We will provide more information on our resiliency efforts during our fourth quarter 2025 earnings call when we issue our 2026 guidance.

So with that, let me speak to our 2025 guidance. As noted in our release this morning, we are updating the full year 2025 guidance as follows: we expect revenues to range between $74 billion and $76 billion. We expect net income attributable to HCA Healthcare to range between $6.11 billion and $6.48 billion. We expect adjusted EBITDA to range between $14.7 billion and $15.3 billion.

We expect diluted earnings per share to range between $25.50 and $27. We expect capital spending to be approximately $5 billion. We are updating our guidance to project growth in equivalent admissions to be between 2% and 3% for the full year 2025. With the approval of the Tennessee program and with updated information from across our programs, we now anticipate our supplemental payment full year net benefit to be between flat and $100 million favorable year-over-year. This projection does not include any potential impact in 2025 from the grandfathering of applications under the act. We believe one of the underlying strengths of HCA is our diversified portfolio of markets.

The recovery in our facilities impacted by Hurricanes Helene and Milton in third and fourth quarter of 2024 is going better than anticipated. However, we have a couple of markets below our expectations that are offsetting some of the better performance in the hurricane- affected markets. We understand the challenges in these markets and have confidence in the plans in place to address them. Ultimately, the increase in our earnings guidance is equally weighted between the updated net benefit from the state supplemental payment programs and the improvement in our overall portfolio operational performance, including the hurricane-impacted markets.

With that, I will turn the call over to Frank for questions.

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

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

Just maybe just asking around the guidance update. So you raised your EBITDA guidance, adjusted EBITDA by about $300 million at the midpoint. I think that's roughly the amount of outperformance that you saw -- seen so far year-to-date in the first half. Just a couple of questions around that.

Obviously, you now have the Tennessee DPP program. Is that -- should we think of that as reflected in this updated outlook? And then second, I know you're making a modest tweak on the admissions number down. You're not alone in that.

Some of your peers have already reported have done that. Any commentary on what you're seeing in terms of underlying demand on the volume front?

Let's talk about guidance first. So if I think about the $300 million increase in guidance at midpoint, as I noted in my comments, about half of that is from state supplemental payment programs, and that does reflect the approval of the new Tennessee program. We expect to receive -- start receiving cash in that here in the back half of the year and probably a material chunk of that in the third quarter likely. It also reflects some just better visibility as we always have here at midyear about the rest of our programs.

So that's about half of the increase. If I think about the other half of our guidance increase, it really relates to our portfolio. And again, as I mentioned in my opening statement, about $150 million of that increase is related to the portfolio. And I would size that for you as follows: it's about $100 million better in our hurricane-related markets.

And you'll recall that we originally guided that to be flat to prior year. So that's $100 million of it. We have a couple of markets that are underperforming, roughly in the $50 million range of impact. So those 2 markets are offsetting some of the hurricane market improvements.

And then really, the rest of our portfolio is performing better than anticipated. So the net combined effect of our combined portfolio, including the hurricane markets, really results in the other half. I might mention, though, just so that you guys can think through this as you prepare your comments. But I think third quarter, the guidance -- the earnings growth will be a little bit lower and fourth quarter is likely going to be a little bit higher in terms of growth rate compared to that midpoint of the guidance.

And that's largely related to both the timing of supplemental payment program payments and specifically to fourth quarter, you may recall that we received onetime payments fourth quarter of last year that do not repeat. And then we believe our hurricane markets, the recovery that we're showing is largely going to be in fourth quarter, if not entirely. So a couple of notes on that. So on volume, let me start and then, Sam, please feel free to jump in.

I know you will. When I think about our volume year-to-date through June of 2.3% equivalent admission growth, and I compare that to our original 3% to 4% guidance coming into the year, there are a couple of moving parts that I would mention. The first is that Medicaid for June year-to-date, Medicaid is down 1.2% to prior year. And we originally believed and built into our guidance the notion that Medicaid would flatten out this year, if not even show a bit of growth coming off of the Medicaid redetermination program.

And then our self-pay charity volumes are only up 1.5% June year-to-date, and we had believed originally that they would at least grow at the overall rate of volume growth. And just for context, our self-pay volumes were up almost 7% in '24 over '23. So the combined of Medicaid and self-pay being below our expectations explain about half of the difference of our current year-to- date volume growth versus our 3% to 4% original guidance. And really, the other half is Medicare. We originally expected Medicare to grow a bit faster than it is, although I would note that a 3% growth in Medicare year-to-date through June is still pretty robust.

So those are the 2 main categories of our volume that are trailing our original expectation of 3% to 4%. And Sam, I don't know if you have.

Let me just add a couple of comments to your Mike, because I think context is always important. You look at the headlines on volume metrics, as Mike just suggested, there's one metric everybody looks at and we get it. But when you start reading through the full story and not just focus on the headlines, you start to see the productive aspects and the qualitative value of the underlying business. For example, we had 14 out of 15 divisions that grew their admissions, 14 out of 15 domestic divisions grew their adjusted admissions.

Our cardiac procedure volume was up 5%. Our obstetrics volumes were up 3%. neonatal volumes up 13%. So the details in many respects, reflect the power of a diversified portfolio of markets and services. I think another point for us, and this is how we look at it, we've had 16 consecutive quarters of volume growth.

And so that consistency tells us that the network model that we're investing in very heavily, and we're focused around execution on it allows us to compete effectively. It's allowed us to sustain market share gains, and we think it adds value for our patients. It adds value for our physicians, and we think it adds value for our shareholders. So yes, the number is 1.7%.

But when you look underneath it, the productive and qualitative aspects of it are more impactful than maybe first understood.

And our next question comes from the line of Ann Hynes with Mizuho.

Can you just provide more details on your resiliency programs? I think the Street really at this point, doesn't believe that the subsidies will be extended. How much of the headwind do you think you can offset in 2026? Is any of this benefit embedded in your 2025 guidance?

Or will it all be incremental to 2026? And any other incremental details about what type of cost savings you'll be doing, that would be great.

So let me kind of summarize our thinking about the One Big Beautiful Bill Act, the EPTCs and how we're thinking about our resiliency program. And then, Ann, as I mentioned in my comments, we will comment further and provide more details related to this in our fourth quarter '25 earnings call when we give guidance for 2026. First, let me start with the act itself. I do believe in the near term that our finance resiliency program should offset the exchange provisions in the act. In the longer term, as it relates to the act specifically, with both the delayed start and the phased-in nature of these provider tax and state-directed payment reimbursement reforms, along with the potential for the approval of the submitted supplemental payment applications, we believe HCA will be able to generally manage these impacts with our resiliency efforts without material impact to our long-term guidance.

Specific to EPTCs, at this point, we do not know what the outcome will be. As noted, we are working to develop our resiliency programs to offset as much as possible any adverse impact should they expire. And again, the potential approval of the grandfathered applications would certainly help. We will comment further as noted, when we do our 2026 guidance.

Suffice it to say, our resiliency efforts, as we continue to work through them, and we've been working on them as you -- as we've talked about over the last year, in a very diligent way, address both benchmarking our corporate departments and shared service organizations against best practices and finding operational improvement opportunities. We are deep in the middle of our field-based resiliency efforts, many of which we commented on before from length of stay and improvement opportunities with our case management operations through significant opportunities around both our automation and our digital transformation agenda.

And our labor and supply-related resiliency plans are also very developed and mature. We will give more updates on that, Ann, when we get to the fourth quarter call, but hopefully, that helps.

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

I appreciate all the color about trends in the various payer classes. I was wondering if you could comment a little bit on commercial volume you're seeing. One of your peers talked about waning consumer confidence driving some weakness in their book. But wanted to see what you're seeing and kind of that weighed against any expectation for a pickup in activity, assuming people are trying to get procedures done toward the end of the year in anticipation of losing the enhanced premium subsidies.

Any thoughts there on what we can expect through 4Q in commercial?

So I'll give you, Ben, June year-to-date, our managed care and HIC equivalent admissions are up 4% over prior year. If you think about how that compares to our expectations coming into the year, it's right there. I mean that's about what we expected for as part of our original 3% to 4% guide. I would say that health care exchanges, which are up 15.8% through June year-to-date are a little better than our original expectation.

And our commercial managed care book, excluding the exchanges, which is up just short of 1 point to prior year, maybe a little below our original guidance, but that's how we read it. We're pleased with the payer mix through second quarter. Sam, I don't know if you have any comments about consumer.

No, I don't think we can make any comments yet about consumer confidence. I think, again, the demand for health care largely over time appears to have been inelastic. I don't know that anything is necessarily changing that. And so it's difficult for us to point to consumer confidence, at least across our portfolio as a driver of activity.

Again, we had good commercial growth in a lot of categories. We had declines in areas, as Mike mentioned, that were government or no payer-sponsored business. We saw declines in pediatrics. We can point to a respiratory environment last year that we didn't have this year.

That influenced our overall statistic. n. Behavioral health admissions were down in our company. Some of that was because we shrunk supply in certain facilities. Again, that doesn't have as good a payer mix as the rest of our business.

So I think from that standpoint, we're still pretty confident, as we mentioned, in the demand for health care across our markets, and we don't see that being disrupted too much in the short run here.

Ben, the only other thing I might mention is that it's a pretty tough prior year comp to prior year. And I think everyone realizes that the prior year had really robust volume growth. Just a couple of notes here when you think about this -- the first half of this year compared to the first half of last year, we still have a bit of a leap year impact. That's about 50 basis points of volume impact.

Medicaid redeterminations last year were fueling big exchange growth last year. You may recall that our exchange volume growth last year was robust over 40%. Kind of an interesting statistic. From first quarter to second quarter of '24, our exchange equivalent admissions increased 14%.

This year, from first quarter to second quarter of '25, they're up about 3%. So we still saw growth sequentially from first quarter to second quarter, but I think prior year just had robust exchange volume growth. And then just the other thing just to keep in mind when you're thinking about the prior year comp is that the Medicare Advantage to bid night rule did impact admissions in '24, and that has sunset into '25. So I think the prior year comparison is also a bit of a story here.

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

Maybe, Sam, just to follow up on some of these discussions on -- and I appreciate your comments on the growth rates that you saw with the different regions. But how are we thinking about market share that you're seeing in the local market? And maybe also in the context of the payers are talking about high utilization rates and that translating to the volume trends that you're reporting. So just curious if you're seeing any dynamics at the local level that you can share with us.

Yes, Brian, thank you. As I mentioned, we've had sustained market share gains, and we think we've continued to accomplish that with the most recent data that we've seen in our market share, if you really sort of exclude behavioral health, given that we put some pressure ourselves, we're above 28%, and we're showing signs of broad-based market share growth across service lines as well as across many of our markets. We do have a few markets as we always do. We have 43 U.S. markets that we focus our share on and some are doing better than others.

But we're fairly agile in responding to those dynamics. I mean there's a lot of investments that we're making in our business. We still have about $5.5 billion worth of capital that is in flight that will add to our networks, both with outpatient facilities as well as inpatient capacity where appropriate. We think that will continue to produce the necessary overall capacity to meet the demand as well as the share gains that we anticipate with our initiatives.

So we continue to find ways to improve what we call the integrity of our network and keep patients inside the system where appropriate for them. And that's an area of focus for us also. So I'm pretty pleased with how our teams are executing on the ground, so to speak, to deliver value for our patients, grow their business and so forth. We recently finished our midyear reviews with all of our divisions, and we're optimistic that their assessments of the markets are continually favorable and will allow us to achieve our objectives as we push forward.

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

One quick clarification and then a real question. clarification. On supplemental payments, I believe you raised the annual guidance by about $170 million at the midpoint. I believe the first quarter was $80 million ahead. Second quarter was $100 million ahead.

So just confirming that you're not changing supplemental payment guidance in the back half of the year. And then the real question is, do you have any color on how your HICS patients have access to employer-sponsored health care but have chosen HIC due to lower cost? I'm just struggling as to look at the millions of jobs created in your states and yet the employer-sponsored growth is tracking below job growth.

Thanks, Peter. Let me start with guidance. As I noted in my comments, about half of our increased guidance at midpoint is coming from state supplemental payments. So $150 million increase in our guidance is coming from state supplemental payments.

That reflects not only the fact that the Tennessee program has improved -- has been approved, but that we expect to start receiving cash here in the back half of the year. I would think about it this way, as you think about kind of the second half of the year versus the first half of the year. In terms of the first half of the year, we've had $180 million of supplemental payment net benefit to year-over-year earnings in the first half. In the second half of the year, we anticipate $130 million decline in net benefit compared to the second half of 2024 and really entirely in the fourth quarter.

And so just as you think about the implied guidance rate in our revised guidance, the second half after considering the hurricane market improvement in fourth quarter and the state supplemental payment decline in the back half of the year, we think that the second half of the year's growth rate is roughly comparable to the first half after considering those factors. We do not, at this point, have good enough insights relative to what percentage of the people who potentially would leave the exchanges if the EPTCs expire that would go back to employee-sponsored insurance other than to say that we believe that there would be a component of those people who lose EPTCs would go back to employee-sponsored insurance.

And as you noted, in our key states, especially our non-expansion states, given the job growth that we've seen over the last several years in places like Florida and Texas, we believe it would be a component of the story. A little early to probably get insights yet until we know what happens with EPTCs.

And our next question comes from the line of Whit Mayo with Leerink Partners.

Just wondering if there are any changes that you guys are seeing in MA behavior or denials, anything to call out that's maybe changed versus last year? And any investments maybe that you've made around documentation or revenue cycle that's also changed?

So just on Medicare Advantage, a couple of numbers here. So Medicare Advantage now represents 58% of our total Medicare admissions. Just one note on the 2-midnight rule. That seems to be fully implemented in 2024. We're really not seeing any additional movement from observation to inpatient there.

As it relates to the payers, we are not seeing any significant impact on our results from denial activities. But I think that does reflect the significant work that we have put into our revenue cycle over the last couple of years to strengthen our organization's management of denials. I'll mention that we have -- over the last year or so, we have initiated several partnership activities with our key partners and our key managed care payer partners. These partnership activities focus on things like digital integration, administrative simplification and better management of disputes.

I think there's a lot of good work in flight between us and our payer partners and hopeful that we can continue to manage through these things as we have been in a really meaningful way. We need them, they need us. And I think we have a good relationship in flight to work through these areas.

And our next question comes from the line of Andrew Mok with Barclays.

Maybe just one quick info request and then a question. Can you give us the latest quote on ACA revenue and admissions? And maybe just a question on the hurricane performance. I appreciate all the color there.

But I think the headwind, at least to start the year was $250 million versus last year. Now you're attributing $100 million of the guidance raised by hurricanes. So does that mean there's still $150 million of continuing headwinds embedded in the guidance for the back half? And can you give us a sense for how occupancy, payer mix and profitability stand in that Mission, North Carolina market versus pre-hurricane?

Let me start with the exchanges, about 8% equivalent admissions and just a smidge over 10% on net revenues for the exchanges as a percentage of total. So on the hurricane markets, remember, if you think about last year, third and fourth quarter of last year, a piece of that $250 million were lost revenues and a piece of that was additional expenses. And roughly 60-40 additional expenses, 40% lost revenue. So you don't get the lost revenue back, Andrew.

And clearly, you do get to go year-over-year on the additional expenses from prior year. So when we were constructing our original guidance for the hurricane markets, we had pretty good confidence and insight that the Largo hospital would have year-over-year growth in earnings because it reopened on December 1. And a lot of the impact there was repairs and maintenance expenses to reopen that facility. And then in our North Carolina division, you may recall, we were concerned that we didn't -- we never closed operations, but we were concerned about the lingering effects of the hurricane in that market because of the broad impact to the population in Western North Carolina.

And so our best estimate at the time when we issued our original guidance was that we thought that when combined, the hurricane markets would be flat year-over-year, '25 compared to '24. As we've gone through the first 2 quarters, what we've seen is a little better recovery than our original anticipation. You may recall that in the first quarter, the year-over-year impact of those 2 markets was relatively flat. The second quarter was a bit negative. I mean there was a decline in earnings year-over-year.

It wasn't material at the company level, but it was certainly a bit negative. We think third quarter could be a bit negative as well, and then we see a recovery year-over-year in fourth quarter. But for the full year, we believe that the hurricane-related markets will come in at about $100 million better year-over- year, which, again, is compared to our original thought of flat. Hopefully, that helps on that.

Yes. And Mike, let me add one thing. What we've seen in North Carolina is greater demand than we anticipated. Unfortunately, we've seen the labor market get more tight, and that's required us to use more contract labor in North Carolina to service that demand.

And so those are really the 2 big items there. Again, this is still a very short period after the storm. We don't know the long-term effects on Asheville, North Carolina, in particular, and what it means to economic development and tourism and so forth. But we're really pleased with how our teams have dealt with the operational requirements, the patient requirements with the situation there, and they continue to push on in a very effective way.

And we remain very bullish about our system in North Carolina, and we continue to add where we can underneath the rules in that state. We continue to improve the quality, and we continue to engage with our stakeholders in a very effective way. So we're excited about the position of Mission Hospital in particular, and where it stands, and we'll continue to execute on the plan that's in front of us.

And our next question comes from the line of Justin Lake with Wolfe Research.

I'm going to try to get at this resiliency stuff and maybe another way without trying to pin you down on it. If the world looks at your -- at what's coming, right, there's going to be a bunch of lost revenue. And when we think about exchanges and these provider taxes, they're certainly very high-margin revenue, right? So as that goes away, there's the potential for a big impact, right?

I don't think I'm telling anything you don't know. The -- I think the main question I'd love to get from you guys here is just you've done an incredible job over time in different operating environments and staying around a 19% to 20% margin. And is that a reasonable framework? Like, look, we're going to lose revenue, but we're going to stay at -- we think with the resiliency efforts, we can keep within that typical margin target.

Is that a reasonable framework to think about the next few years?

Justin, this is Sam. I don't know if I'm going to put a frame of reference on any of that at this particular juncture. We need to get through the last half of the year to understand exactly where the premium tax credits land. We will score that.

We are actively developing our cost plan in order to respond to that. I will tell you this, we have a pattern of owning our realities, whatever they happen to be and finding pathways forward to accomplish our financial objectives, our growth objectives, our return on capital objectives, our quality objectives. And I'm confident that we will do that in an appropriate fashion as we push forward. And so we're not ready to give you a margin range.

We're not ready to give you a revenue implication just yet because it would be inappropriate for us to do that until we have greater clarity on exactly how this lands where some of these people go if they do, in fact, lose coverage. And we understand everybody's concern and desire to want to try to score it. But you got to give us some sense of time here and an ability to sort of process it. But when I pull up and I think about who this organization is, the people we have on our team, the position we have in the markets that we serve, I'm pretty confident that we'll get to where we need to be.

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

Going back to the guidance discussion, there was a comment about a handful of markets that were underperforming. Can you give us some sense for the drivers of that underperformance and then the actions that are underway to improve results?

Yes, this is Sam. We have 16 geographic divisions in HCA when you include the U.K. We have 15, obviously, in the U.S. Every year, we have 1 or 2 of them that aren't accomplishing what we hope they accomplish for a variety of reasons.

Certain volumes don't materialize as we anticipate, competitors do something that we didn't expect. Physicians have dynamics that create flow of business. It's so variable. So we have 2 divisions.

I'm not going to call them out on this call other than to say we're confident in our overall positioning in both of them and what they're doing in order to respond. These are seasoned leaders in these hospitals and in these divisions. There's been some competitive dynamics in one division that's dislocated some of our business, but we're responding to that appropriately. In the other division, there was a bit of service mix change, nothing structural, but it hit us pretty hard in the second quarter, and we're reacting to that appropriately with our costs, but we expect fully that, that will recover in the second half of the year.

And so this is sort of the normal give and take with what's uniquely, I think, our diversified portfolio. And again, having geography differences across the company allows us to absorb 2 divisions that didn't have the performance that we anticipated. And that's what happened last year. We had a couple of divisions that did not accomplish their objectives in '24, and we overcame it last year, and we're doing it again this year.

And our next question comes from the line of Josh Raskin with Nephron Research.

Could you provide just a little bit more color on maybe surgery volumes, both on the inpatient and outpatient side? And maybe any changes in trends you're seeing around site of care?

So outpatient surgery is a continuation of kind of our past stories here, Josh. I mean I would note that on the pure case count standpoint, we were down 0.6% for the quarter, which is better than our most recent trends and still almost entirely driven by Medicaid and self-pay and a bit of a drop in lower acuity cases. I would note, as we've noted before, that we are seeing good revenue growth in our outpatient surgery book of business, call it, 7.5%, 8% growth here that we're seeing on the revenue side. So that's good.

And really, if I pull up outside of just outpatient surgery and look at outpatient in total, we had a good quarter. I mean our total outpatient revenue grew almost 8%. So all 4 categories of our outpatient book that we track performed well. The inpatient surgery is a very similar story on payer mix.

And the biggest impact was a drop in Medicaid cases on the inpatient side. So inpatient surgeries on a same-facility basis were relatively flat in the quarter, and it's pretty much payer mix on Medicaid driven.

And our next question comes from the line of Sarah James with Cantor Fitzgerald.

Can you talk about how commercial exchange and self-pay compare historically on fee schedule and revenue collection rate? And to the degree we see some shifting in volume to self-pay in the future, is there anything that your team can do on the revenue collection strategy side to improve collection rates on self-pay?

Yes, Sara. So let me kind of double-click on patient collections a bit here. When I think about the patient portion or the patient balance that's owed under our commercial contracts, the first thing that we track is this idea of what do we typically see on an annual basis in terms of the increase in the average patient balance owed. Over many years, we've seen kind of mid-single-digit increases annually on the amount patients owe as part of their kind of overall commercial increase.

And then in recent quarters, we've seen that a little higher, and that's been influenced by the health care exchanges where patients do tend to have a little bit higher patient responsibilities compared to traditional commercial. Regarding collectibility of those amounts owed, we've generally maintained our historical levels of collection on patient balances on our traditional commercial population. The health care exchange population, the rate of collection is a bit lower than on the traditional side, the traditional commercial side. But overall, we have not seen yet any significant impact on the collectability of our patient receivables in the aggregate.

So that's kind of an update on what we're seeing relative to patient collections.

But are you able to give us a comparison to what that looks like versus self-pay? So for the uninsured population that self-pays, how much of a delta is there on collection rates or the fee schedule charge?

We collect very little cash from the truly uninsured populations there. Really, what you see with truly uninsured is you get a little bit of a pickup on DISH. But there is not any material collections that would fall into a material zone for the company on the uninsured population.

And most uninsured patients in our company qualify for either our charity programs or significantly reduced amounts due to our patient protection policy. So there's not a lot of revenue produced for uninsured patients.

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

Can you give us an update on the commercial contracting percentages over the next couple of years, I guess, in terms of what's already negotiated and what's still kind of hanging out there? And then on CapEx, we've heard from several larger nonprofits that the outlook is very uncertain. They're taking a pretty cautious approach, maybe in some cases, cutting budgets. I guess, is there a scenario where you see that in your markets and actually ramp up capital spending to try to capture some of that market share maybe longer term?

So our managed care contracting to date, we're largely done for '25. For '26, we're about 80% contracted, again, achieving the targets that we had established for each of those contracts. And we're about 1/3 of the way through '27, again, achieving the targets that we had assigned to those specific contracts. So we're pleased with where we are in our contracting cycle. We continue to try to work with the payers to create value for them, easy access for their beneficiaries.

And then as Mike alluded to, eliminating some of the administrative friction and costs for both them and us, creating a better experience for our patients and a better experience for their members and even our physicians who participate in the process. So that's where we are on the managed care side. And I'm pleased with our position at this particular juncture. With respect to capital expenditures, the company is continuing to operate on the inpatient side at north of 70% occupancy, maybe 73%, 74% occupancy year-to-date.

We have, as I mentioned, $5.5 billion worth of capital that has been approved and is in the pipeline under construction and should come online later this year, next year and on into '27. And we continue to see opportunities for us to add to our networks, as I mentioned. I think we're today, I don't know, close to 2,700 facilities in our company. We continue to add facilities both through greenfield projects as well as acquisitions where we can, and we will look for those as well. As it relates to competitive dynamics, we do think there are opportunities for us to accelerate investments in certain situations and put ourselves in a better position to achieve our objectives, and we will sort through those in the normal course.

But I don't see anything necessarily positioning a rapid acceleration in our spending to accomplish that.

And our next question comes from the line of Kevin Fischbeck with Bank of America.

Okay. Great. I just wanted to go back to kind of think about the exchange subsidy expiration. There are a few dynamics in there.

I guess one is, can you just remind us what your exchange revenue was as a percent of total back in 2019 before these enhanced subsidies were in place? And I guess, is there any reason to think that, that wouldn't drop back down to that level? And you mentioned that there was the potential that, that might drop, but many of those people might show up on commercial. Can you -- is there any way to kind of go back and look and see historically, if there was a shift out of commercial when exchange grew and maybe help quantify what that looks like?

Kevin, as we noted in the call, we're going to be -- we're not going to really give that kind of detail right now. It's pretty difficult to size that at this point. So as we get through the balance of this year, and we have a better understanding of what happens to EPTCs and a little better understanding of how we think the population will react to what happens, we'll be in a better position on our fourth quarter call to address those more detailed questions at this point. I'll just note again that we're at 8% of volume now with a little bit over 10% on revenues at this point.

Okay. And then maybe you can just clarify, did I hear you say earlier that you think that between the bill and the expiration of the subsidies, over the longer term, you still expect to grow EBITDA 4% to 6% so like a 5-year-plus time horizon. Even with the impact of all these things, you'll still grow EBITDA in that range. That's the expectation?

No, it's a good point. Let me go back through that just so that it's clear on what we said. So as it relates to the act itself, in the near term, we believe that our financial resiliency program should offset the exchange provisions in the act. In the longer term, as it relates to the Act specifically, with both the delayed start and the phased-in nature of these provider tax and STP reforms, along with the potential of the approval of the submitted supplemental payment applications, we believe HCA will be able to generally manage these impacts with our resiliency efforts without material impacts to our long-term guidance.

And then regarding the EPTCs, as you know, we do not know what the outcome will be at this point. But we are working to develop resiliency programs to offset as much as possible any adverse impact should they expire. And so we will roll all that together, Kevin, as noted, when we comment further when we issue our '26 guidance on our fourth quarter 2025 earnings call.

Okay. That's helpful. So the mitigation is both the your actions and the additional SDP approvals combined. That's what gives you confidence in the 4% to 6%.

Yes. I'll stand on the statement.

And our next question comes from the line of Raj Kumar with Stephens.

I just have one on trying to frame the $600 million to $800 million of targeted savings that you had over the 5 years when you did that during the Investor Day. Just trying to bogey where we're kind of at from those cost initiatives standpoint, given that we're kind of like 1.5 years into that 5-year outlook? And maybe if you've identified any additional opportunities to bolster the financial resiliency initiatives kind of given the policy unknowns that we have over the next couple of years?

So we -- as we noted in our Investor Day conference at the end of '23, we've been hard at work at developing our resiliency program really across 3 main categories of work, you may recall from the presentation. The first one is around benchmarking and really getting to ground and benchmarking both our corporate and shared service functions against the rest of the Fortune 100 and then helping our facilities benchmark their performance across a series of both operational and cost metrics to help them find their biggest opportunities for improvement. And then we leverage our best practices to help them identify those opportunities and take action.

And so that's benchmarking. Significant efforts in flight around both automation and digital transformation we've commented on this before, but our digital transformation agenda includes a series of focused areas in our administrative platforms and in our operational platforms that we believe hold significant promise as we move forward. And really third is just continuing to better leverage our shared service platforms. And we're adding additional functions over time to our shared service platforms to really drive that benefit of scale of standardization and best practice as we move forward.

Really since the Investor Day meeting and as we've gone through the last 12 to 18 months, in light of these potential challenges, we have both accelerated and enhanced these efforts. And so as we have gone through this year, we've been working very carefully with all of our teammates and colleagues across the company to ensure that we're identifying our best opportunities and then take action as we go through the balance of this year and into '26 and beyond. And so that's a quick update of where we are on our resiliency program. And again, as we noted here during the call, we'll give a more fulsome update on that when we give guidance on our fourth quarter call.

Andy, I think we have time for just one more question.

And so our final question will come from the line of Lance Wilkes with Bernstein.

Great. Could you talk a little bit about compensation ratio and labor supply and talking a little on overall, how you're managing that so well, if there are outlooks as far as how you're changing the number of employees relative to what you're seeing with wage inflation? And if there are any expectations that you could give us for contracts and wage inflation for the second half of the year?

As we noted even on the first quarter call, we're seeing a pretty stable labor environment, Lance. And our wage inflations are coming in about where we expected them to be. I think we've noted before, we've seen a pretty significant improvement in our contract labor as a percent of SWB here over the last several quarters as we kind of worked off of the pandemic and moved through that in a productive way. We're down now to 4.3%.

Contract labor is 4.3% of SWB. And if you go back to before the pandemic, I think it was like 4.1%, 4.2% in that range. So we're -- I still think there's some room for improvement, and we're working hard on that, both in terms of better retention and better recruiting. But I do think that just at a macro level, the clinical labor side is pretty stable.

I mean I would note, and we've talked about this before that the one area of our workforce that is still a bit elevated in cost pressures is our physician cost. Our same facility professional fees did increase about 10% over prior year, which was about what we expected. So that component of the business, we're still dealing with some greater than inflationary levels of cost pressure. But on the pure labor side, I think we're in good shape.

And that concludes our question-and-answer session. So I will now turn the conference back over to Mr. Frank Morgan for closing remarks.

Abby, thank you for your help today, and thanks to everyone for joining us on the call. We hope you have a great weekend, and we're certainly around to answer any follow-up questions you might have.

And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.