HCA Healthcare Q4 2023 Earnings Call Transcript

Participants

Corporate Executives

• Frank Morgan, Vice President, Investor Relations
• Samuel N. Hazen, Chief Executive Officer
• William B. Rutherford, Executive Vice President and Chief Financial Officer

Analysts

• A.J. Rice, UBS Group AG
• Pito Chickering, Deutsche Bank Aktiengesellschaft
• Justin Lake, Wolfe Research
• Ben Hendrix, RBC Capital Markets
• Gary Taylor, TD Cowen
• Brian Tanquilut, Jefferies Financial Group Inc.
• Ann Hynes, Mizuho Securities
• Whit Mayo, Leerink Partners
• Kevin Fischbeck, Bank of America Securities
• Stephen Baxter, Wells Fargo & Company
• Jason Cassorla, Smith Barney Citigroup
• Scott Fidel, Stephens
• Sarah James, Cantor Fitzgerald
• Lance Wilkes, Sanford C. Bernstein
• Josh Raskin, Nephron Research
• Calvin Sternick, J.P. Morgan

Presentation

[Operator]

Welcome to the HCA Healthcare Fourth Quarter 2023 Earnings Conference Call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Vice-President of Investor Relations, Mr. Frank Morgan.

Please go ahead, sir.

[Frank Morgan, Vice President, Investor Relations at HCA Healthcare]

Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen and CFO, Bill Rutherford. Sam and Bill will provide some prepared remarks and then we'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 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.

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

All right. Good morning to everybody and thank you for joining the call. We finished 2023 better-than-expected across most dimensions of our business. In the quarter, we experienced strong demand for our services across our diversified portfolio of markets, facilities and service lines. This growth coupled with improved cost trends drove solid financial performance in the fourth quarter.

Diluted earnings per share excluding gains on sales were $5.90, which represented a 27% increase over prior year. We're encouraged by these results and believe the operational momentum we've created should position us well for 2024. As mentioned at our recent Investor Day, the staying power of HCA Healthcare was on display again throughout the year. Diluted earnings per share, excluding gains and losses on sales and debt retirement, for the year grew almost 13% as compared to 2022.

As a management team, we pride ourselves on the following. First, owning our realities, whatever they are. Next, making a big company small, so we can adjust timely. And third, being disciplined in thought, resource allocation and execution, helping us to accomplish our mission. Once again, I believe our people have impressively demonstrated these traits in the face of new challenges and delivered positive outcomes for our patients, the communities we serve and our other stakeholders. Often refer to them as can-do people, and again this past year, I think they proved it. I want to thank them for their hard work and everything they do for our company.

Same-facility volumes across the company were strong in the fourth quarter. Admissions grew 3% year-over-year. Equivalent admissions were up 4%, emergency room visits grew 2%, inpatient and outpatient surgery volumes increased approximately 1%. Most of our other volume categories, including cardiac procedures and rehab admissions, had a solid growth metrics in the quarter also.

All domestic divisions had equivalent admissions growth in the quarter. Additionally, payer mix and acuity levels in the quarter improved year-over-year. These factors along with certain enhancements in a couple of state's Medicaid supplemental programs, helped to reduce same-facilities revenue growth of 11% in the quarter. Bill will provide more detail on revenue in his comments.

Operating margins improved in the quarter as we were able to generate solid operating leverage across the company on the increased revenue we produced as compared to the prior year; but even more impressively, when compared sequentially to the third quarter. We executed well over the year on our people agenda. In the quarter, we saw further progress on key metrics as evidenced by solid employee engagement results, stable turnover trends and reductions in contract labor utilization.

As we have detailed in the past, we have implemented a comprehensive human resources plan. We expect to make further progress on it as we move into 2024. Our plan will remain a top organizational priority with significant investments in workforce development and training, which includes expansions in both Galen College of Nursing and our Centers for Clinical Advancement.

With respect to hospital-based physician costs in the quarter, we slowed the rate of growth. As it pertains to the Valesco, our physician staffing joint venture, we reduced the operating loss in the fourth quarter more in-line with our expectations. As indicated at our Investor Day, we expect to invest significantly this year in our long-term plans, which we designed to take our company from strength to strength and achieved the growth potential we see in our core business.

These investments revolve around three distinct opportunities. The first one includes continued network expansion in facilities, services and workforce to meet the demand growth that we expect in our markets, while also supporting our efforts to increase market share. In 2024, we have over $2 billion of new capital projects scheduled to come online that will increase capacities. Additionally, we expect to integrate a number of newly acquired hospitals and outpatient facilities that should complement our networks.

The second opportunity includes a robust agenda designed to advanced digital capabilities across the company and unlock the embedded value we see in our operations. As high-performing as we are today, we believe there is more operational potential inside our company. With evolving technological tools, we are investing to unlock this value. We believe this initiative together with our Care Transformation and Innovation program will enhance quality, drive further efficiencies through our financial resiliency program, and improve overall operational management capabilities, including integrating our revenue cycle in case management functions better.

The third area of opportunity pertains to the flexibility we have to use our balance sheet position and strong cash flow production to invest heavily in our business and our people, while also allocating capital to our shareholders. In 2024, we plan to increase capital spending to over $5 billion and enhance our share repurchase program to around $5 billion. We continue to believe this strategic plan will produce more winning plays for our organization, allowing us to deliver better services for patients, while also creating value for other stakeholders.

Let me close with this. The constants in our organization consists of three principles; giving our patients what they deserve whenever they need services, partnering with our physicians to deliver high-quality outcomes, and leveraging the distinct elements of HCA Healthcare to improve performance. Our approach to delivering on these core values comes from what we term the HCA Way, that is supporting our local provider systems with value-added enterprise-level capabilities, coupled with disciplined and detailed oriented management team that relentlessly focus on execution.

This operating philosophy has helped us navigate different economic cycles, adapt to changes in the industry and address challenges such as the COVID pandemic. As we look to the future, we have designed our next-generation growth plan to build upon the strengths we have developed over the years and take advantage of the opportunities in front of us. I am proud of HCA Healthcare and even more proud of our people. We will move into 2024 and the years ahead with greater purpose, with a renewed agenda to drive sustained growth and with confidence in our abilities to deliver value and positive outcomes for our stakeholders.

With that, I'll turn the call to Bill and he will discuss in more detail the quarter's results and 2024 guidance.

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Okay, great. Thank you, Sam, and good morning, everyone. I will provide some additional comments on our performance for the quarter and year, and then discuss our 2024 guidance. We highlighted at our recent Investor Day that our formula of combining strong operational performance with a disciplined and balanced allocation of capital has a long track-record of generating value over-time.

Our results for 2023 and our guidance for 2024 reflect a continuation of this formula. Sam provided many of our fourth quarter indicators in his comments, so let me take a moment to review some of our results for the full-year 2023. We had strong topline growth. For the year, our same-facility admissions grew 3.3% over prior year, equivalent admissions grew 4.8%, emergency room visits grew 4.7% and total surgical cases were up 2.3%.

We maintained our strong acuity trends with case mix index increasing, and payer mix improved with managed care and other admissions growing 6% for the full year on a same-facility basis. Revenue per equivalent admission grew 2.7% on a same-facility basis. This contributed to same-facility revenue growing 7.6% and 7.9% on a consolidated basis for the full year 2023. We coupled top line strength with strong management of operating cost.

Salaries, wages and benefits as a percentage of revenue improved 60 basis points on a consolidated basis compared to prior year. Contract labor declined 20% for the year and equated to 5.3% of SWB in the fourth quarter. Our teams continued to do a great job managing supply cost, which improved 40 basis points as a percentage of revenue for the full-year.

As we have mentioned throughout the year, we are managing through pressures on professional fees and hospital-based physician costs. We saw an improvement in the sequential rate of growth in both the third and fourth quarter. Sam mentioned we also saw an improvement in our Valesco joint venture, which was in-line with our expectations. We are confident in our plans to continue working through what we believe are industry-wide pressures in this area.

The result of this is we produced solid margins of 19.6%, in-line with our range of expectations on a consolidated basis and adjusted EBITDA growth of 5.5% on an as reported basis for the full year 2023. So, as a management team, we are very pleased with the operational performance of the company during the year.

Let me briefly discuss our results in the fourth quarter. Adjusted EBITDA grew just under 14% in the quarter as compared to the prior year. This was primarily due to strong revenue growth and solid expense management during the quarter. In addition to our strong core business trends, we recognized a year-over-year adjusted EBITDA increase of approximately $250 million related to our supplemental payment programs.

This includes the new North Carolina program and certain favorable adjustments within the Texas program. Additionally, based on our experience with the program to-date, we began accruing the Florida program in the quarter whereas previously we had recognized this program on an annual lumpsum basis.

Our recently acquired entities as well as facilities divested in the prior year resulted in about $90 million less adjusted EBITDA in the quarter, with roughly half of this decline from the Valesco joint venture.

In summary, the quarter was the strongest operational performance of the year. And with the additional benefit from the supplemental programs and impact of new divested facilities, we are very pleased with the year-over-year growth we were able to produce.

So, next, let me speak to capital allocation. We deployed a balanced allocation of capital in 2023. For the full-year, our cash flow from operations was $9.4 billion compared to $8.5 billion in the prior year or just under 11% growth. Capital expenditures were just above $4.7 billion for the year, which was in-line with our expectations. We purchased approximately 3.8 billion [Phonetic] of our outstanding shares and paid approximately $660 million of dividends during the year. Our debt-to-adjusted EBITDA leverage remains near the low-end of our stated guidance range of 3 to 4 times. So we believe we are well-positioned going into 2024.

And with that, let me speak to our 2024 guidance for a moment. As noted in our release this morning, we are providing full-year 2024 guidance as follows. We expect revenues to range between $67.75 billion and $70.25 billion. We expect net income attributable to HCA Healthcare to range between $5.2 billion and $5.6 billion. We expect adjusted EBITDA to range between $12.85 billion and $13.55 billion, and expect diluted earnings per share to range between $19.70 and $21.20. And finally, we expect capital spending to range between $5.1 billion and $5.3 billion.

So, let me provide a little additional commentary on our guidance. First, let me note that $145 million payer settlement we recorded in the first quarter of 2023. Our guidance assumes a growth in equivalent admissions between 3% and 4% and revenue per equivalent admission between 2% and 3%.

Regarding supplemental programs, I want to highlight that these programs are complex, and most have multiple at reach [0:31:09] that impacted timing and amounts we received. So this results in some variability of the timing of recognizing the impact of these programs during the year. For 2024, we are anticipating benefit from a new program in Nevada. But based on current assumptions, we expect some modest headlines when we aggregate the impact of all of these supplemental programs and we believe this could range between $100 million and $200 million for the year.

We expect full year margins to be within our historical trends and cash flow from operations to range between $9.5 billion and $10 billion. Depreciation is estimated to be about $3.2 billion and interest expense is projected to be around $2 billion. Finally, our fully-diluted shares are expected to be around $264 million for the year.

As also noted in our release this morning, our Board of Directors has authorized a new $6 billion share repurchase program. This will be in addition to the approximately $300 million remaining on our prior authorization. In addition, our Board declared an increase in our quarterly dividend from $0.60 to $0.66 per share.

With that, let me turn the call back over to Sam.

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

All right. Thank you, Bill. As you saw in our press release, Bill Rutherford has decided to retire after 34 years with the company, 10 years as CFO and Bill has had a tremendous career with HCA. And then, in my communication to our colleagues throughout the company, I indicated that it's impressive as the results worked financially with the company during his tenure.

Bill's legacy with the company will be remembered by the many people in the company that's positively impacted with his leadership, mentorship, and the way he embraced our mission and culture. And so, Bill congratulations on your retirement and thank you very much, on behalf of the Board and the senior team for everything you've done for the organization.

Now part of Bill's legacy is creating a really deep financial team inside our organization. We pride ourselves on having the capabilities to build talent and then replace talent and we're fortunate to have Mike Marks as our next CFO. Mike has been with the company for 28 years. He has had various roles, most of which were in the Nashville Group as the Group CFO for the Nashville Group for 10 years and then he has been in the Senior Vice-President and Financial Operations role for the last few years.

He is a proven HCA Executive. He understands and appreciates our culture. He knows how to execute and get results and I know he is going to be an exceptional CFO for HCA and I'm eager for many of you to get to meet him. So Mike, congratulations.

So, with that Frank, we will go to questions.

[Frank Morgan, Vice President, Investor Relations at HCA Healthcare]

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

Questions and Answers

[Operator]

All right, thank you so much. [Operator Instructions] Okay, looks like our first question comes from the line of A.J. Rice with UBS. Caller, please go ahead.

[A.J. Rice, Analyst at UBS Group]

Thanks. Hi, everybody. Best wishes, Bill, on the retirement. And congratulations to Mike. I just want to ask about volumes because there's obviously some different chatter out there about what's going on. I think coming into the fourth quarter, you guys had said you expected to see a return to normal seasonality. I wonder whether that's what you describe what you saw there? Do you have any updated thoughts on whether we're seeing a sicker population post COVID or maybe just some pent-up demand from people going back to the doctors.

And then, specifically as well on utilization review management. We've talked about that from time-to-time that health plans are getting more aggressive post pandemic now about utilization review. There is also chatter in the last week about maybe there is actually easing around observation status. I wonder if you could tell us a little bit of what you're seeing in that category as well.

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

Well, let's see, A.J., it's Sam. There is about four questions there. Let me see if I can sort of synthesize them. I will tell you, from our judgment we had normal seasonality with respect to most categories of our business and we had indicated last year that we thought seasonality trends had returned in the latter half of 2022 and they continued, in our estimation, into the latter half of 2023 with the natural seasonality that we see in our outpatient areas as well as some of our other surgical areas for the most part from the third quarter this year to the fourth quarter.

How that was influenced by new policies and pent-up demand, we can't really determine that, and we don't believe it had a material impact. So, from our standpoint, we've been optimistic that our strategy around our network development, our execution on our quality and patient safety agendas and then our partnerships with our physicians was going to allow us to continue to grow. We mentioned that at our Investor Day, and we think that's part and parcel to what's happening with our business as we push through the latter part of the year.

I mean, there is always utilization, policies and procedures coming from the payers, there's like I've said, some changes in certain policies. It's way too early to judge the effect of those, and we are really judging our business and thinking about 2024 optimistically around where the demand for healthcare is at least in our markets.

[Operator]

Okay, thank you. Our next question comes from the line of Pito Chickering with Deutsche Bank. Caller, please go ahead.

[Pito Chickering, Analyst at Deutsche Bank Aktiengesellschaft]

Hey, good morning, guys, and thanks for taking my questions. And Bill, it was a real pleasure working with you over the years, so thank you very much for all that. On supplemental payments, sort of a larger unpack there. I guess, can you bridge actually was supplemental payments were in '22, '23 versus '24 is absolute dollars? And also on the opex side, how much the supplemental payment taxes were again for '22, '23 and '24? Thanks so much.

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Yeah. Pito, let me put it this way. I can't give you all of that detail right now, as we've talked about. We view supplemental payments as really just part of our overall Medicaid revenue portfolio. I think we're up to 17 or 18 states with supplemental payments programs right now. As I mentioned in my comments, each of these programs have a level of complexity and multiple attributes to it that affect the timing of when we recognize those.

In the quarter, as I mentioned, we did recognize the benefit of the new North Carolina program. That was anticipated. We had a settlement in Texas and we began accruing Florida accounts for it. So, we can maybe offline give you a quarter-by-quarter break down, but those were the main things that affected us during the fourth quarter. But we'll mention, even with the supplemental payment programs, the core operations of the business remained strong. When we look at core revenue growth as well as our revenue per unit growth, we believe that supplemental payments were just additive to what was already a strong quarter.

[Operator]

Okay, thank you. Our next question comes from the line of Justin Lake with Wolfe Research. Justin, go ahead.

[Justin Lake, Analyst at Wolfe Research]

Thanks, guys, and I'll start-off by adding my thanks to Bill. I appreciate all the help over the years and you'll be missed and congrats to Mike. My question was around Medicare specifically, and a couple of things. One, you talked about commercial being strong. We've been hearing Medicare and Medicare Advantage trends have been specifically really strong in the quarter. Can you give us some color on Medicare revenue growth and Medicare volume growth in the quarter.

And then specifically, I think in reference to A.J.'s question, thing we just tried to touch on was the impact of the Two-Midnight rule. Can you talk about what's going on there for 2024 and what you think the impact might be? And did you see any early benefits in 2023 just started ramping-up into this? Thanks a lot.

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Yeah. Justin, thanks for that. Let's start with the Medicare volume, as I know that's been a topic. We have seen some growth in our Medicare Advantage admissions, which were roughly up 10% in the quarter, which is pretty consistent for what we've seen throughout the year. And we think even probably a combination of conversion from traditional Medicare fee-for-service as well as some of our volume gains and maybe a bit utilization. It's hard for us to break that down in its entirety on there.

In terms of our revenue per unit between Medicare Advantage and Medicare has been very consistent through the year as well. So we didn't see any, really step-change in the fourth quarter of that material amount. When I think about the Two-Midnight rule, as Sam alluded, it's too early for us to judge the impact of this rule. We know it's got a period to be implemented. We believe ultimately it's going to benefit our patients, and we think overtime could be some moderate positive result for us. But we've seen no impact yet, but we believe over time as we go through '24, there could be some modest benefit as we go through that.

[Operator]

Great, thank you. [Operator Instructions] And our next question comes from the line of Ben Hendrix with RBC Capital Markets. Ben, go ahead.

[Ben Hendrix, Analyst at RBC Capital Markets]

Thank you very much, and congratulations to Bill and Mike. Just wanted to follow-up on your comment about the $5 billion of capital spending you expect, just wanted to get an idea of how you're thinking about allocating that into your inpatient capabilities in higher acuity and where you think -- where you think -- how should we think about that evolving through the year and the impact on case mix as we look into your 2024 guidance? Thank you.

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

This is Sam. We have been pretty consistent with our allocation over the years between inpatient, outpatient and technology, and I think 2024 will be somewhat consistent with that. I will tell you, we do have a large development pipeline of new outpatient facilities that are connected to our capital project. In 2024 and 2025, we'll have quite a few come online, little bit more than we had '23 and '22.

We do have some new hospitals in a few markets that will come online, and we're starting to invest in other markets. So, I think when we look at the volume of beds and so forth coming on in '24, it's about the same as '23, if I remember correctly. And then, our ER capacity is growing consistently. So, we're pretty consistent in our allocation of capital. It's not disproportionately oriented to any one category of our business and we think again that approach has yielded really strong returns.

It has allowed us to meet the demand expectations that exist in the market and it also responded to our physicians in a way that created the capacity or allowed for the clinical technology that they need to practice their medicine. So, we're stepping it up because we have a growing occupancy on the inpatient side. And then we have opportunities in the outpatient side to expand our networks further in these fast-growing communities. That's pretty much the snapshot of it, but it's generally consistent from an allocation standpoint to prior years.

[Operator]

Great, thank you. And our next question comes from the line of Gary Taylor with TD Cowen. Gary, please go ahead.

[Gary Taylor, Analyst at TD Cowen]

Hi, good morning. One clarification and then I'll ask my real question. I just want to make sure I understood what Bill said and congrats to Bill, by the way. You were walking through the net Medicaid DPP EBITDA outlook for '24 and I think you said overall you expecting that dollars to come down $100 million to $200 million. I want to make sure I heard that correct.

And then my real question was, just you talked about stemming the Valesco operating losses sequentially to more in-line with what you originally thought, which, I think means maybe bring that down to sort of breakeven in the quarter and I was just hoping you'd share with us a little bit about how operationally you pulled that off.

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Yes. Gary, this is Bill. Thanks for those comments. Let's start with DPP. You're correct in my comments, we are expecting. Overall, when we aggregate all the programs to potentially be a headwind, anywhere between $100 million and $200 million, largely due to settlements that we received this year. We don't expect to reoccur and then the Florida beginning accrual had an impact to that. So, that's what's mostly driving that across our multiple programs.

On Valesco, as we mentioned, it came in-line with our expectations, which I think in last quarter we sized just under $50 million or so a quarter as we continue to work on multiple improvement initiatives, including further integrating that joint venture into HCA. We expect to see continued improvement going forward next year. I think Valesco for the full year will equate with about the same amount we recorded this year but we had nine months this year versus 12 months obviously in 2024. So, we do believe over time there will be continued improvement and we're working diligently towards those efforts.

[Operator]

Thank you. And our next question comes from the line of Brian Tanquilut with Jefferies. Brian, please go ahead.

[Brian Tanquilut, Analyst at Jefferies Financial Group]

Hey, good morning. And Bill, congrats on a very successful career at HCA. I guess my question to follow-up on Gary's, maybe expanding it further to the broader labor outlook, how are you thinking about the opportunity to further reduce spending on both nursing and obviously at Valesco? Or maybe another way to ask it is, how are you viewing inflation at the wage level. Thank you.

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Well, I think we've proven that our teams have managed through that very well during the inflationary period we experienced. I think going forward, we expect to move back into kind of the normal trends, which is generally 2.5% to 3% of wage inflation going forwards and then we believe there is continued improvement in contract labor to be achieved and we have plans to execute that throughout 2024.

On the professional fees and Velasco, we have a number of initiatives with teams working on that to not only further integrate into our operations, but to continue to figure out adjustments to those programs. Our professional fees, I've talked to, we have seen a decline in the sequential rate of growth. So, we're a bit encouraged with that. As we go into '24, we would expect those sequential declines to continue, and we're working hard through multiple initiatives, whether it'd be revenue enhancements, program adjustments or are looking at opportunities to internalize some of those programs.

[Operator]

Thank you. And our next question comes from Ann Hynes with Mizuho. Ann, please go ahead.

[Ann Hynes, Analyst at Mizuho Securities]

Good morning. Thank you, and I also want to congratulate Bill on his retirement. I just have a couple of follow-ups just on the managed-care pricing yield assumptions for 2024, which is up 2% to 3% which looks a little conservative given the Two-Midnight rule.

And when you look at Medicaid determinations, the growth in the health exchange and your states are very strong. So, in your guidance, do you embed any benefit from the Two-Midnight rule or kind of the shift from Medicaid potentially to commercial.

And then secondly, if you can just maybe give us some more detail about how the Two-Midnight rule could impact you maybe a percent of our admissions or maybe kind of a differential between revenue per admit would be great. Thanks.

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Yeah. Ann, this is Bill. Let me first clarify, our 2% to 3% managed care rates [Phonetic] are aggregated revenue per equivalent admission and then obviously there's categories underneath it. I would tell you regarding Medicaid redetermination, it's still early. We believe there is some modest benefit that we've seen, as patients have migrated from Medicaid into Hicks and other employer sponsored. I don't believe that's material yet. We'll see how that continues to trend throughout 2024. And I'll say, we don't have a material -- in fact a material not factored into our guidance on that.

On the Two-Midnight rule, as we said earlier, it is really early in that progression. It should be positive for us if it's implemented as expected. I think it will be positive for patients overtime as well, and we'll just have to see how that plays out, but we don't have, I'd say, a material adjustment factored into our '24 numbers for that as well. Our range of guidance I think accommodates a more -- various outcomes on both of those programs and we'll see how that plays out as we go through the first part of the year.

[Operator]

Great, thank you. [Operator Instructions] And our next question comes from Whit Mayo with Leerink Partners. Whit, please go ahead.

[Whit Mayo, Analyst at Leerink Partners]

Thanks and congrats to Bill. I think this might be the second time you've retired, so I hope it sticks. But my question really, Sam, is, I'm curious on any new expense initiatives that you guys have elevated internally as a new strategic focus, anything maybe more creative or imaginative that you're bringing forth this year to challenge the organization. Thanks.

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

Well, at our Investor Day, Mike Marks presented our Financial Resiliency Program and it's got different components to it. There is more sophisticated integration of our revenue cycle that includes our Case Management Initiative, which I'll highlight here. Our Case Management Initiative is to make sure that our patients get into the right setting, in the right timeline and free-up capacity where appropriate.

And so, for this past year, we had early-stage success with that. Our length of stay was down and our case-mix was modestly up. So, when you put the two together, it's a good start for us with respect to our Case Management Initiative. That is important on multiple fronts. It allows us to allocate our nurse staffing more effectively to more acute patients and so forth. We will continue to invest in that initiative as we bring on more technology, more structure to our teams and better process in benchmarking.

The second thing I would highlight is, with respect to what we're calling our Internal Benchmarking Initiatives, we have incredible opportunities to compare more deeply into our organization, whether it's on the variable cost side with respect to what we allocate and distribute to our facilities or on fixed costs and both of those categories are getting a lot more benchmarking under Mike's leadership and we're finding opportunities to rethink how we organize our cost structure, how we leverage our process improvement, how we use technology and automation in those areas to improve processes in variable cost. So I'm excited about the prospects there.

As I mentioned in my commentary, we had a very successful transition from the third quarter to the fourth quarter with respect to what we call clearance, operating leverage, and our operating leverage from the third quarter to the fourth quarter was the best I've seen in my experiences with the company, and I think part of that, not all of that, is due to some of these initiatives and the transparency we have around our efforts to improve efficiencies, improve clinical outcomes for our patients and so forth.

So, those are two things I would highlight. Obviously, our technology agenda and our care transformation is a longer run effort with respect to improved outcomes across different dimensions of our business, and we've had some modest success there in the short-run, but we're really banking on those programs, giving us long-term value. So, those are just a couple of highlights.

I will tell you, our teams culturally are disciplined. And as I've mentioned, that discipline creates opportunities for us to find better ways to do things for all of our stakeholders, and that mindset is something that we carry-forward from one year to the next, then we'll carry that on into '24, on into '25 and so forth. And we think it's an essential ingredient for a health system's success and I'm pretty proud of our teams in how they embraced that and how they execute on the initiatives to make that happen.

[Operator]

Thanks, Whit. And our next question comes from the line of Kevin Fischbeck with Bank of America. Kevin, please go ahead.

[Kevin Fischbeck, Analyst at Bank of America Securities]

Great, thanks. And I'll just add my thanks to Bill for your help over the years. I guess, wanted to know -- get a little more color from you guys about the volume expectation for 2024, because you're [Indecipherable] talk about two to three that are contributing for faster growth in '24. So just wanted to better understand where that extra growth is coming from. So, any color on the service lines, which procedures that you think still have room to grow above-average, and if there's anything that you'd expect from a payor mix perspective in '24 or is there one type of payer where you think there is a big opportunity for volumes to snap back? Thanks.

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Kevin, let me start and then Sam can add in. So, we're going off our experience we've seen throughout '23, and as we said earlier in the comments, we thought there was very strong demand for services in our markets. We think our capital programs and our program initiatives are paying-off. Our adjusted admissions this year were 4.8%. You're right, our guidance next year called us for 3% to 4% expectation on adjusted admissions that may be a little higher than our 2% to 3% historical, but I think we're reading continued strong demand.

We saw really strong enrollment in the health insurance exchanges across our states, and that continues to be a favorable development for us. We believe we'll continue to see strong economic indicators and employments and our access to contracted lives remaining wells. So, I think all of those factors go into play with our expectations for '24 and is based on kind of our current experience.

[Operator]

Great, thank you. And our next question comes from the line of Stephen Baxter with Wells Fargo. Stephen, please go ahead.

[Stephen Baxter, Analyst at Wells Fargo & Company]

Yeah. Hi, thanks and congrats to Bill as well. Was hoping you could talk little bit about surgical growth in the quarter, whether there's any notable puts or takes there by service line or inpatient versus outpatient. And then I guess the overall growth slowed down a little bit as we got to the back half of the year. I guess how are you thinking about surgical growth in 2024 and especially coming up against maybe some of the tougher comparisons that you'll have in the first half of the year? Thank you.

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

So, overall, the fourth-quarter surgery was a little slower than the year-to-date and we were talking about that earlier this morning. We did have a more difficult December calendar. Even though we had the same surgical days in total, the way they were allocated created some challenges at our outpatient setting that we saw outpatient activity not as strong as in the previous two months of the quarter. But, at a structural level, there's nothing to suggest that our surgical volume trends are going to change.

For the year, we had really solid volume growth in surgery and we continue to invest heavily in our programs, both on the outpatient side and supporting our inpatient activity with more acute and complex program offerings. And for the year, our inpatient surgeries were up 2%, and our outpatient surgeries were up 2.5%. So that's why migration if you will, into the outpatient setting, and we think that will be generally consistent as we push into 2024.

We do have a number of ambulatory surgery centers that have opened or will open in 2024. We've made a few acquisitions in certain markets with ambulatory surgery centers and we continue to invest in our hospital operating suite as well as improve our processes, just as we are improving our emergency room processes with our revitalization program. And we think that will continue to be a value-add for our patients and for our physicians and help us with our volume pursuits.

So, that's how we're judging the surgical space. If you look at cardiac underneath that, our cardiac volumes continue to grow very robust and are actually growing in the mid-single-digits, and we think again that's reflective of our overall program development, expansion into new service lines underneath cardiac and responding, again, to our patient needs and physician needs in ways that we believe are productive for our organization.

[Operator]

Excellent. Our next caller, or excuse me, our next question comes from the line of Jason Cassorla with Citigroup. Jason, please go ahead.

[Jason Cassorla, Analyst at Smith Barney Citigroup]

Yeah, great. Thanks for taking my question and best of luck in your retirement, Bill. I just wanted to follow-up on the professional fee environment. You noted there were some deceleration in professional fee spend growth, if I heard that correctly. But maybe what is your expectation for physician costs or professional fees growth embedded within '24 guidance. And then on Valesco, it sounds like from your comments Bill that Valesco would generate a $150 million of negative EBITDA next year versus the $200 million or so headwind for '23. Is that a fair way to look at it or any other color that would be great. Thanks.

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Yeah, let me and in, and thanks for that. I think Valesco is a little lower. We're about $150 million in both years. But obviously in '23, we added nine months versus 12 months next year. So, we see a kind of run rate improvement as we go through the quarters during the year.

On pro fees, we -- as we said, have seen a decline in the sequential rate of growth. We have multiple initiatives underway. Embedded in our guidance next year is holding that professional fee growth perhaps to 8% to 10% versus this year where it's been closer to 15% to 20%. So, we are looking for a step-change and we're confident in our initiatives, and the activities we have to be able to begin to bend that trend line.

[Operator]

Great. Thanks, Jason. And our next question comes from Scott Fidel with Stephens. Scott, please go ahead.

[Scott Fidel, Analyst at Stephens]

Hi, thanks, and I'll echo my congrats to Bill. And then my question is, would be curious in terms of how you're thinking about the whole broader debate on just the pent-up demand recovery in the seniors population. And based on all your data and analysis, sort of where you think the Medicare utilization trends are now at this point relative to sort of pre pandemic levels and returning to the baseline. Certainly felt like there was some -- quite a bit of that recovery played out in '23, but interested in sort of what inning you think we may be in that process at this point? Thanks.

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

This is Sam. You know, it's interesting I'm just looking at a trend line here and I don't have it beyond this time period. But in 2019, this is a composite view of Medicare. So, it has both Medicare and Medicare Advantage. Our Medicare admissions grew 2.6%. You throw out 2020 and 2021 grew 2.1%, 2022 grew 3.4% and 2023 grew 4%. So, is there acceleration on our trend? Yes, but obviously there is aging baby boomers in the mix there, number one. Number two, we think we're picking-up market share.

So, to judge overall utilization patterns around that, it's really difficult for us. There is population growth in our markets. When you look at adjusted admissions, on the same combination payer class. Again, 3.7% in 2019, 5.3% in '21, 4.7% in '22 and 5.7% in '23, so slight acceleration, but a function we believe of aging baby boomers and number of beneficiaries moving in the program, population growth thrust and market-share gains. So it's hard for us to judge underneath that whether or not there is some structural change in utilization. That's almost impossible for us to discern with the data that we have.

[Operator]

Great. Thank you, Scott. And our next question comes from the line of Sarah James with Cantor Fitzgerald. Sarah, please go ahead.

[Sarah James, Analyst at Cantor Fitzgerald]

Congratulations on the retirement, Bill. You guys said that the impact of the Two-Midnight rule ramps through the year. So, a ramp as opposed to flipping a switch. What are the mechanics of that staged implementation? Is it retraining your staff or is it assuming some delay in benefit from claims denials and getting the payers on board and then when would it be fully ramped? Are you talking mid-year exiting 2024 and is there anything that HCA can do to pull that forward?

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

Well, I mean, the rule goes in effect January, so I think the impact may ramp over time. It's a notable change for the payers. So, we're working them very closely on the administration of those claims and making sure it's operating as described on their. And if it does, we should see it equally throughout the year. And so, we're working closely on it, but it's a pretty big change for the payers. And so, there might be some administrative differences as it gets implemented through the year. But we hope very quickly we'll be able to work our way through that and begin to see some benefit as we go through 2024.

[Operator]

Thanks, Sarah. Our next question comes from Lance Wilkes with Bernstein. Lance, please go ahead.

[Lance Wilkes, Analyst at Sanford C. Bernstein]

Great, and congratulations to both Bill and Mike. Can you talk a little bit about labor supply that you're seeing. First, in the past, say couple of quarters ago, you talked about like demand that had been turned away at the hospitals, if you can just note, if there's still any of that. And then how is kind of hiring pipelines, and are there particular areas that are more plentiful or areas that might be bottlenecks? Thanks.

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

This is Sam again. Thank you for the question. We finished the year roughly, I don't have the exact average here, at 90% acceptance rate. In other words, we weren't able to take roughly 10% of the patients who were referred to us through our transfer centers and such. That improved throughout the year as we went from maybe mid-to-high in the first part of the year to a little better than that in the second half of the year.

We're still below where we were in 2019. But what we have seen is more patients coming through our transfer centers and other patient navigation programs than we did in 2019. So, we feel good about the inflow, if you will. We are still at times in situations where all of our capacity is not open and available and that's what generates these situations where we can't receive the patients that are coming through these navigation programs and transfer centers.

We think that will continue to get better in '24 as we have capital coming online, as our hiring patterns continue to improve. Our turnover, as I mentioned in my commentary, has also improved. We've been very intentional in trying to create a great environment for our people with good leadership, resource capabilities and just overall training to support the efforts so that they can be successful in what they do. And we think that will help us push through '24 and hopefully have more capacity available and be able to receive the patients that want to get into our system.

[Operator]

Great. Thanks, Lance. And our next question comes from the line of Josh Raskin with Nephron Research. Josh, please go ahead.

[Josh Raskin, Analyst at Nephron Research]

Hi, thanks. Good morning. I'll thank Bill and congratulate him on the retirement and congrats to Mike as well. Could you speak to the increase in capex guidance again. This has been a multi-year trend for you guys and maybe how returns on capex have trended. I'm just curious if there is more mix to outpatient, is that actually improving returns or are you getting to a point where the returns are coming in a little bit lower for the incremental project as you sort of continue to go down the list. Thanks.

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Josh, this is Bill. I'll start on the returns. Our returns remain very solid. I mean, we're in the upper-teens returns. We have a very disciplined process where we evaluate these projects, and we actually do look-backs to validate some of our assumptions. And to me, the growth in the capital spending is a reflection of the growth of the opportunities we see to deploy capital to continue that growth. So we're very pleased with the returns on those. I think, as Sam mentioned earlier in the Q&A, the mix between inpatient and outpatient varies from time-to-time, but mostly similar. We do have some newer outpatient facilities coming on, they generally have a very good returns and quick returns when they do come online. So, I think the capital program, we're pleased with, it's an important component to our growth formula as we've talked about and we're pleased with the overall returns in the aggregate.

[Samuel N. Hazen, Chief Executive Officer at HCA Healthcare]

Yeah. And the only thing I would say, and Bill alluded to this, our outpatient platform tends to be short cycled returns. We get real efficient sort of capital allocation with outpatient facilities. And then on the hospital side we are hospital centric health system. And as we invest in our hospitals, those are long-lived assets and they have a longer-cycle to them, with respect to returns, but they're critically important to the overall value that our outpatient facilities can generate for our system in the sense that we're able to navigate the patient further into the healthcare system if they need more acute care offerings.

So, we have to look at it in both manners. I think, to Bill's point, we have had strong returns, a pattern of strong returns. We have occupancy on our inpatient hospital side in the low 70%, which is a pretty high occupancy level, up over where it was pre pandemic, even with the additional beds that we've added. So, we think the network model that we highlighted for you all at the Investor Day is working and is complemented by the outpatient facilities integrated with the hospital system in a manner that produces really positive enterprise returns for our company.

[Operator]

Great. Thanks, Josh. And our final question comes from the line of Cal Sternick with J.P. Morgan. Cal, please go ahead.

[Calvin Sternick, Analyst at J.P. Morgan]

Yeah. Thanks for squeezing me in, and I'll add my congratulations to Bill as well. So, two follow-ups. First on the redeterminations. It sounds like that's a slight benefit to the 2024 guide, but not really material yet. Just wanted to clarify, if this does develop better than you're anticipating, is that something you think could be material to 2024 or is the upside more annualized in 2025 after the redeterminations are completed?

And then, my other question is on the quarter itself. So, one of the payers called out higher COVID inpatient cost per case. Can you talk about the COVID acuity levels that you saw in this quarter and whether that developed consistently with what you've seen in the past?

[William B. Rutherford, Executive Vice President and Chief Financial Officer at HCA Healthcare]

Yeah, this is Bill. Let me start with the Medicaid redetermination. I think your characteristic is right, we do see some modest benefit in 2024, [Indecipherable] to be material yet, but our range of guidance allows for some outcomes on there. We started to see some of the effect of those redeterminations late in 2023. We're tracking those very closely. We're seeing roughly 30% to 35% of those individuals that were potentially lost Medicaid, seem to show up with either Hicks, or employer-sponsored coverage so there is some benefit in that.

We're seeing a decently large number being able to be reapplied into Medicaid because some were redetermined off for technical reasons. So, we've been able to manage through that. And I think with the conversion into either Hicks or employer-sponsored there is some modest benefit as we go through the year and potentially that will continue as we go through 2024, but don't judge it yet to be material at this stage.

Regarding COVID, to be honest, we haven't -- COVID has really been stable for us over the past year. In total, our COVID admissions are roughly 2% of our total admissions. I don't really have any data on acuity, but I think it's very, very stable and hasn't really been a material factor in our overall operating results, of late.

[Operator]

Great, thanks all. And that does conclude our question-and-answer session. I would now like to turn it over to Frank for closing remarks. Frank, the floor is yours.

[Frank Morgan, Vice President, Investor Relations at HCA Healthcare]

Sure. Great. Thank you for your help today and thanks to everyone for joining us on the call. Hope you have a wonderful week. And we'll be around this afternoon and the balance of the week, if we can answer any additional questions you might have. Have a good day.

[Operator]

[Operator Closing Remarks]