Happy Friday, Hospitalogists!

Before I let you off for the weekend, we're diving into the $60B enterprise that tis HCA Healthcare.

Today we're diving into HCA's recent investor day. It's pretty long, so I decided to split up the analysis into 2 parts for you guys, with part 1 today and part 2 next week.

Part 1:

Key takeaways for hospital execs, healthcare professionals, and investors on HCA's investor day
What drives HCA's success - market selection and density
HCA's growth strategy

Part 2 next week:

Optimizing operations - What IT investment and digital transformation looks like for HCA
A hyper focus on nurse and physician pipeline
Tying HCA's grand strategy together
Challenges on the horizon for HCA & Hospitals

This one took me - and is taking me - a while to put together, so if you find it valuable I'd appreciate you passing it along!

Finally, check out my offer to join the Board Room community below - exclusive holiday offer!

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HCA INVESTOR DAY BREAKDOWN

Key Takeaways

Resources:

HCA’s Investor Day. What do Operators & Investors need to know?

Note: I have no position in HCA

The main takeaways HCA wanted folks to leave with from this investor day:

HCA’s business is longstanding and defensible despite ongoing competitive threats
Despite everyone’s best efforts, the CBO is projecting long-term hospital expenditures to accelerate which benefits HCA
HCA is well positioned to capitalize on healthcare’s future state given its strong capital structure and existing investments / footprints in its markets.
- Strategies include tight physician alignment, doubling down on higher acuity volume, ER expansion & investment, urgent care expansion & investment
HCA is investing in digital transformation to drive efficiency
HCA is hyper focused on nursing and physician capacity, offering internal programs and investing in education, career advancement to support hospital capacity and diversity of leaders along with support for future facility growth.

In my mind, the biggest question mark is how believable you think this narrative is. And for me, despite everything going on in the hospital sector, it’s hard not to believe that HCA is a unicorn among health system operators and will continue to respond to ongoing challenges while (hopefully) continuing to drive better patient outcomes.

HCA’s Success: It’s all about Markets and Density, Dummy

In its opening investor day remarks, HCA felt a need to defend its business - characterizing its longstanding strategy as enduring and defensible - given the ongoing conversation in healthcare related to health system disruption (characterized very well in this Gist Healthcare post, image, and analysis):

Image credit: Gist Healthcare - The Weekly Gist: The Travis Unwrapped Edition

- “Beyond inflation and high labor costs, health systems are struggling because competitors—ranging from vertically integrated payers to PE-backed physician groups—are effectively stripping away profitable services and moving them to lower-cost care sites. The tandem forces of technological advancement, policy changes, and capital investment have unlocked the ability of disruptors to enter market segments once considered safely within health system control.”

Despite the above rhetoric, HCA seems insulated, and there’s a reason for that. HCA is objectively an incredible, cash-flowing business that has survived and thrived through multiple take-privates, significant healthcare reforms.

How?

They are thoughtful about the markets they enter and exit and the population characteristics present in each. Their hospital and ambulatory footprint is massive. HCA market demographics generally are faster growing from a population standpoint, have higher income, and are stronger jobs markets. Some examples from a recent BofA research note:

Source: BofA Global Research, Deep Dive into HCA’s hospital assets - positioned to outgrow the industry

Side note: has HCA ever disclosed how many doctors it aligns with? Maybe I’ve missed it before, but alignment (NOT employment) with 46,000+ doctors is formidable:

HCA achieve market density in those markets to command market power and favorable negotiation with payors, making investments in delivery assets to support hospital vitality, including ASCs, urgent care, and freestanding EDs.

“For us to be successful, we have to build networks that have local scale, they have to have a local scope of services and facilities, and we have to integrate them into a cohesive network, which we believe creates value for our patients. It creates value for our physicians and it creates value for the payers.”

This is our flywheel. This is how we plan, this is how we resource. This is how we drive execution as a company. Inside the flywheel is the local piece of our organization. We have 16 geographic divisions that have responsibility to make the inside of the flywheel turn. They have been structured organizationally around each of our markets in a way that gives us the opportunity to develop networks within the communities that we serve and ultimately execute on the operational agenda that we have.

HCA tends to do a good job with foreseeing challenges on the horizon - for instance, doubling down on its investments in the Galen College of Nursing to boost its nursing pipeline, or acquiring its hospitalist JV from Envision before cash flow problems got worse.

Because they’re for-profit, despite the tax advantages of nonprofit health systems, HCA can run much more efficiently. HCA isn’t beholden to complex governance structures or operational inefficiencies that plague nonprofit competitors. As nonprofit systems continue to struggle, divest, close service lines, or hemorrhage clinical talent, HCA will naturally accrete inpatient market share and insulate itself further in its markets.

Stated differently, HCA is the 800 pound gorilla (though I’d go up even further in mass from there).

HCA gave us an interesting look inside its market entry and subsequent investment in the Austin market through St. David’s, growing into the #1 health system in a fast-growing urban market:

Now back in 1995, we formed the St. David's HealthCare partnership. And when we did that, there were 4 hospitals and 1 ambulatory surgery center in the primary service area or what we would call the in-market geography. And over time, in that immediate service area, we've added 3 more hospitals, 4 freestanding emergency departments, 25 urgent care centers, 11 ambulatory surgery centers, 75 outpatient clinics, and it's all supported by a 2,900 member medical staff.

Now in the outreach market, we've added affiliated hospitals, we've added clinics, freestanding ERs, telemedicine sites and [indiscernible] operations. And in addition, we also have 2 de novo hospitals that are in the planning stages for the Austin market over the coming years. So all told, this has formed the largest, most comprehensive healthcare network throughout Central Texas and frankly, one that is perennially recognized nationally for its quality.

HCA Growth Strategy Breakdown

Here's a good overview into HCA's growth strategy:

Expand networks into markets with growing demand and favorable demographics

Hospitals act as anchor facilities in HCA markets
Continued investment in inpatient + outpatient resources ($5.3B annual CAPEX spend!!)

Patient capture: Keeping patients within the HCA referral network with this investment

So collectively, today, if you roll it all up across our system, we have roughly 12 outpatient access points for every 1 HCA hospital. And over the next few years, you'll see that easily growing to a ratio of 20:1. We're meeting patients where they want to be served. We're making it convenient for them and offering them a broad range of clinical services so they don't need to seek care outside of our local networks.
In 2022, our urgent care clinic produced 220,000 referrals, primarily to specialists in the emergency room setting. From these urgent care clinics, HCA was able to retain 56% of the patients going to specialists and 61% of the patients going to the ER. While those numbers are best-in-class, you can obviously see there's more opportunity for us there. Our urgent care platform will continue to be a key source of growth, likely moving from predominantly acquisition to de novo of development and building out our network.

85% of admissions come from urban markets; 15% from rural

ED Pipeline: Leaning on ER volume and market share growth as pipeline for admissions. HCA has added 2500 ER beds and plans to add another 700+ in the near future to this end.

Investment in higher acuity service lines.

40% of HCA revenue comes from high acuity services across specialties like cardiology, oncology, and orthopedics. Given aging populations and more advanced diseases, we’re going to see that acuity and case mix continue to grow. Makes sense that you’d want to continue to target higher acuity stuff as HCA given that outpatient migration is capturing market share in lower acuity services within ASCs and OBLs. This strategy more effectively insulates HCA from that threat, but HCA still holds execution risk with its ability to recruit highly sought after subspecialists to perform higher acuity services in its hospitals.

This quote in context is hilarious, as HCA seems almost exasperated by the constant ‘shift to outpatient’ narrative they’re having to battle:

“Sam referenced the diversity of our portfolio. We're not dependent on any 1 single service line for greater than 14% of our inpatient hospital net revenue. This mitigates risk, risk from having new drugs to market that may prolong a patient getting treatment or that shift from inpatient to outpatient we've been talking about for 10 years. This contribution margin, as you might expect, is higher than our average contribution margin for these complex patients. One reason we go for that.”

On recruitment away from academic medical centers:

In the old days, those physicians would probably have been attracted to an academic medical center. We're faster, we're more nimble. We give them voice. We are less bureaucratic and physicians love that. These academic centers without our scale are at a competitive disadvantage. And so this growth in CMI has generated net positive growth on our revenue. The first example I want to give you is our neuro. In 2016, we took a very deliberate approach to building the infrastructure by building out these comprehensive stroke centers. These high acuity patients often require surgery or intervention as that first video you watched. This impacted both our case mix and our market share. We added 10,000 incremental admissions over this time period, 121% growth in our stroke surgeries.

Commentary on physician alignment and high acuity care:

Cardiac care is another terrific example. In 2013, we took a deliberate approach in expanding and deepening our CV service lines. The outcome of that was that we grew our 120 programs for ECMO, for ventricular assisted devices, for ablation across our platform. So this is about broadening and deepening. The examples I gave you on the right is just showing you the sheer growth that happened during that time period. Right here in Nashville. In 2008, our Centennial Heart, which is our flagship hospital here in Nashville had 6 cardiologists. Today, there are 41, serving 4x the access sites, they grew the CMI by 50% and expanded our network.

And finally, cancer. In cancer space, we did -- and over the last 10 years, HCA experienced 92% growth in our transplant and cellular therapies. This makes HCA the nation's leader in bone marrow, CAR-T and gene therapy research. We served patients from 36 states to 7 transplant centers as shown by the blue lines on the graph. We perform more transplant from the academic medical centers of Mayo, MD Anderson and Dana Farber. The exciting thing that happened in the last year is that we did a partnership, a joint venture with McKesson. This brought together 2 community care assets and created this care closer to home.

If you are a cancer patient, that's what you want. You want second to none quality and you want it right in your backyard, and we've successfully done that. We put 250 -- with McKesson, we got 250 research locations, we embedded the 1,500 medical oncologists under the U.S. oncology brand that this was about not just doing research and doing cutting and medicine, which we all get really excited about, but it's doing care. It's doing care for our patients and our families.

HCA is fine with physician independence:

In order to attract physicians, we've developed a value proposition. As I mentioned, a number of our physicians are independent. So generally, they are selecting where they admit their patients and where they choose to practice. The key elements of a value proposition that we've identified are giving physicians voice, creating capacity, both physical capacity, but also efficiency in their practices, helping them grow and then wrapping it around exceptional clinical capabilities. We strive to give physicians voice to ensure that they are heard. Jon talked about the physician relations representatives that are out in the field, interacting with our medical staff, understanding what we do well, so we can do more of it, understanding where the challenges are in our health system so that we can carry that back to our operators, and we can continuously improve.

Physician Graduate Medical Education Program:

HCA is also increasing existing physician supply by offering physician pathways to hospitalist programs via internal Graduate Medical Education programs. The pipeline aims to generate an internal funnel for increased physician capacity and target need areas in key specialties including anesthesiology, psychiatry, and emergency medicine.

That's it for Part 1 - check back next week for part 2 on HCA's investor day! It'll be published online then as well as a standalone version.

'TIS THE SEASON FOR SAVINGS

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JOBS IN HEALTHCARE

Here are some jobs that I’m curating for the healthcare industry. You can see the full list of jobs I’ve curated here. If you’re looking to hire, use the promo code HOSPITALOGY to get your first job listing free on my curated job board.

MISCELLANEOUS MADDENINGS

I need to know what the P&L looks like for LIV after reports indicate that Jon Rahm signed onto the golf league for upwards of $400M - $600M. LIV now has several of the top professional golfers in the world today, so it all but assures that the PGA Tour has to go to bat with them. Keep that popcorn handy for the end of the year and any announcements coming from that camp. I'll be watching!

Thanks for the read! Let me know what you thought by replying back to this email.

— Blake

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