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Edited Transcript of HCA earnings conference call or presentation 30-Jul-19 2:00pm GMT

Q2 2019 HCA Healthcare Inc Earnings Call

NASHVILLE Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of HCA Healthcare Inc earnings conference call or presentation Tuesday, July 30, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Samuel N. Hazen

HCA Healthcare, Inc. - CEO & Director

* W. Mark Kimbrough

HCA Healthcare, Inc. - VP of IR

* William B. Rutherford

HCA Healthcare, Inc. - Executive VP & CFO

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* Benjamin Whitman Mayo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care

* Brian Gil Tanquilut

Jefferies LLC, Research Division - Equity Analyst

* Frank George Morgan

RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research

* Gary Paul Taylor

JP Morgan Chase & Co, Research Division - Analyst

* Joshua Richard Raskin

Nephron Research LLC - Research Analyst

* Justin Lake

Wolfe Research, LLC - MD & Senior Healthcare Services Analyst

* Kevin Mark Fischbeck

BofA Merrill Lynch, Research Division - MD in Equity Research

* Matthew Dale Gillmor

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Peter Heinz Costa

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

* Ralph Giacobbe

Citigroup Inc, Research Division - Director

* Sarah Elizabeth James

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the HCA Second Quarter 2019 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 Senior Vice President, Mr. Mark Kimbrough. Please go ahead, sir.

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W. Mark Kimbrough, HCA Healthcare, Inc. - VP of IR [2]

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Well, thank you for the promotion, Ian, I appreciate that very much. Good morning, and welcome to everyone on today's call and our webcast. With me this morning is our CEO, Sam Hazen; and Bill Rutherford, our CFO, which will provide comments on the company's results for the second quarter.

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. Many of these factors are listed in today's press release and in our various SEC filings.

Several other factors that will determine the company's future results are beyond the ability of the company to control or predict. In light of the significant uncertainties inherent in any forward-looking statement, you should not place undue reliance on these statements. The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events.

On this morning's call, we may reference measures such as adjusted EBITDA and net income attributable to HCA Healthcare, Inc. excluding losses or gains on sales of facilities, which are non-GAAP financial measures. A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HCA Healthcare, Inc. to adjusted EBITDA is included in today's second quarter earnings release.

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

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [3]

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Good morning, and thank you for joining us today. Earlier today, we reported our second quarter results. The results were driven by positive trends in the following areas: solid volume growth, cost metrics that were mostly in line with our expectations and good performance from our acquisitions. These positive results were offset by slower growth in revenue per equivalent admission, which resulted in reported revenue and adjusted EBITDA that were slightly below our internal expectations.

Adjusted EBITDA grew by approximately 3% to $2.3 billion with adjusted EBITDA margin at 18.2%. Diluted earnings per share in the quarter was $2.25, which was down 2.6% from last year. We have carefully reviewed what drove this slower revenue growth. And importantly, we don't believe it presents a headwind with respect to achieving our full year's earnings guidance. Bill will provide the details in his comments.

Revenue grew by almost $1.1 billion, a 9.3% increase. This increase was driven by volume growth broadly across our markets, service lines and by revenue generated from our recent acquisitions. On a same-facility basis, revenue grew by 4.3%; inpatient admissions and equivalent admissions grew 2.1% and 2.6%, respectively; emergency room visits grew 3%; and total surgeries were up modestly. We have now grown same-facility inpatient admissions in 21 consecutive quarters. Inpatient market share trends remained positive for the company.

Based upon an analysis of our results and year-to-date performance, we are confident in the second half of the year. We have not seen any major structural changes within our markets from a competitive standpoint, physician standpoint, payer standpoint or execution standpoint. The fundamentals in our markets remained strong with growing demand for health care services.

We continue to believe we are well positioned for growth as we execute our operational initiatives, improve the overall competitive positioning of our local health care systems and integrate our acquired hospitals. The strategic investments we are making to expand the inpatient and outpatient capacity within our networks and improve our clinical capabilities create more opportunity for patients to access high-quality convenient care in an HCA Healthcare facility.

With that, let me turn the call over to Bill.

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [4]

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Okay, thank you, Sam, and good morning, everyone. I will cover some additional information relating to the second quarter results. Then we will open the call for questions. As Sam mentioned, our volume stats were solid, and I'll provide some additional information.

During the second quarter, same-facility Medicare admissions increased 2.5% and equivalent admissions increased 3.2%. This includes both traditional and managed Medicare. Same-facility Medicaid admissions increased 3.2% and equivalent admissions increased 2.3% in the quarter compared to the prior year. Our same-facility commercial admissions were flat while equivalent admissions increased 1.9% in the second quarter compared to the prior year. Same-facility self-pay and charity admissions increased 5.1% in the second quarter compared to the prior year and was in line with our expectations.

When looking at our 3% growth in emergency room visits in the quarter, our level 1 through 3 visits increased 0.6% while our higher acuity level 4 and 5 visits increased 4.9% over the prior year. In addition, admissions to the emergency room increased 3% over the prior year. Same-facility net revenue per equivalent admissions grew 1.7% over the prior year in the quarter. This growth rate was lower than our recent results, which has averaged 1.5% to 2% higher.

So let me give you a little more information on factors that affected this in the quarter. And there are 2 primary drivers I would like to call out. Our commercial revenue growth was softer in the quarter primarily because admissions were flat and there was a moderation of our acuity growth in the quarter, which was primarily driven by a decline in inpatient surgeries. The second item is that we had some favorable revenue items last year across some state supplemental and graduate medical education programs that did not reoccur this year.

Our total adjusted EBITDA impact from these supplemental programs was approximately $65 million, which was primarily attributable to revenue.

We do not believe the supplemental programs will be a headwind for the remainder of the year. Our year-to-date revenue performance is in line with our full year expectations. Year-to-date same-facility net revenue per equivalent admission has increased 3%, which is within our guidance range of 2% to 3% for 2019.

So let me move on to operating expenses. Operating expenses per equivalent admission for the second quarter were consistent with recent trends. Our same-store operating cost per adjusted admission grew 3.1% over the prior year in the quarter. While our cost as a percent of revenue did increase in the quarter, we view this as a function of the softer revenue growth I discussed previously. Our recent acquisitions had an approximate 80 basis point unfavorable impact on margins for the quarter. Same-facility labor trends were consistent with recent trends in prior year. Man hours per adjusted patient day and employee per occupied bed, 2 key productivity indicators, both improved 0.8% compared to the prior year.

Same-facility average hourly rate grew 2.6% in the quarter versus prior year. Same-facility supply cost per equivalent admission grew 2.1% over the prior year period. Same-facility other operating expense per adjusted admission rose 3.6%, mainly due to a change in some state supplemental program expenses, which I mentioned earlier. In summary, while our revenue results were softer than our expectations, our adjusted EBITDA was only about 1.5% below our internal expectations. And overall, we remain pleased with our year-to-date performance.

So let me take a moment to talk about cash flow. Cash flow from operations was strong in the quarter. Cash flow from operations totaled approximately $2 billion versus $1.58 billion in the second quarter of last year. Capital spending for the second quarter was $964 million, in line with our expectations. During June 2019, we issued $5 billion aggregate principal amount of senior secured notes and used the proceeds to temporarily reduce the outstanding balance on our asset-based revolving credit facility. During July 2019, we redeemed $4.95 billion outstanding aggregate principal amount of senior secured notes.

Pretax losses on retirement of debt totaling $211 million for these redemptions will be recognized during the quarter ending September 30, 2019. During the second quarter, we paid $242 million to repurchase 1.9 million shares and had $1.75 billion remaining on our previous authorization as of June 30, 2019. Also as mentioned in our release this morning, our Board of Directors has declared a quarterly cash dividend of $0.40 per share.

At the end of the quarter, we had $5.7 billion available under our revolving credit facilities and our debt-to-adjusted EBITDA ratio was 3.83x. However, the amount available under our revolving credit facilities would have been $2.47 billion and the debt-to-adjusted EBITDA ratio would have been 3.66x after giving effect to our July 5, 2019, debt redemptions. As noted in our release, we adjusted our full year 2019 guidance with projected adjusted EBITDA to range between $9.6 billion and $9.85 billion and projected EPS to range between $10.25 and $10.65.

So let me turn the call back over to Sam before we go to Q&A.

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [5]

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Thank you, Bill. Before we go to Q&A, I want to make 4 more points. First, our management teams are relentlessly focused on executing our agenda as we have always been. Secondly, we are confident in what we are doing and our outlook for 2019. Third, periodically, we have quarterly results that don't reflect our longer-run beliefs. The first quarter was that and the second quarter was also that. That's why we believe year-to-date performance is more indicative. And fourth, where appropriate, we are making adjustments to our cost structure as we historically have done.

So with that, Ian, let's go into questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question, it comes from Pito Chickering of Deutsche Bank.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [2]

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Just to drill down a little bit more on the inpatient admissions for your commercial book of business, a couple questions. Can you sort of talk about sort of different markets, if that weakness was sort of widespread among the markets? You talk about some more competition. Did you see some markets that had increased competition from that? And then also on strategic investments, you guys are continuing to invest in inpatient admissions. Does the 2Q results change your view of making those investments?

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [3]

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All right. Pito, thank you. This is how I would answer that question. We had 12 of 14 domestic divisions that had admission growth. We had 12 of 14 adjusted admissions -- or divisions that had adjusted admissions growth. On the managed care side, we had 8 divisions that were up, 2 that were flat and 4 that were down. On surgeries, in total, we had 9 divisions that were up, 1 was flat and 4 were down. So generally speaking, our portfolio performed pretty well. We did have a couple of markets that were softer than we anticipated. We understand what those drivers are. We think we have the appropriate responses in place to deal with them and we'll continue to execute on those.

To give you a few more statistics on the volume side, which again the company had a very productive volume quarter, rehab admissions were up 8%. As Bill said, our emergency room visits were up 3%. Our trauma was up almost 15%. We had tremendous growth again in our cardiac volumes with our PCI volume, our cardiac cath volume up 2.5%; electrophysiology, up 4%; CV surgery, up 4.5%. So we had very broad-based, as I mentioned in my comments, service line growth and also division-wide growth.

The issue is we were a little bit softer in total for our managed care admissions, as Bill alluded to. And that did put some pressure in the quarter on our revenue. I don't think it significantly changes our thinking around investments. As I mentioned, we believe our strategy is appropriate for the market. We continue to invest in it in an appropriate way, in my opinion. And we think it will produce opportunities for the company to generate growth in the future.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [4]

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Great. The one follow-up, if the weak commercial story continues in the back half of the year, what leverage do you guys have available on the cost side to react to those -- to the softness?

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [5]

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Yes, Pito. This is Bill. Let me try to address that. As Sam mentioned, our teams are making adjustments every day. We have great operators and we're obviously proud of the work they do. We manage productivity daily, even hourly, matching our labor trends to projected volume. And I mentioned our productivity gains in the comments. We have process improvement teams throughout our operations, who work in a variety of cost efficiencies, such as throughput in the emergency room and OR, also working with our clinical teams on clinical efficiencies. We benchmark ourselves to our best performers on a wide range of metrics and identify improvement opportunities.

We continue to strive for cost efficiencies in our support structures and continuing to leverage size and scale, which we've been doing for some time in revenue cycle, supply chain, information technology support, human resources and the like. And then as Sam mentioned, we'll look for fixed cost and overhead reductions, where appropriate and where we believe we have the opportunity. So we continue to believe we have appropriate control systems around managing our cost structure. As we step back, we don't think cost management was the issue for the quarter. We continue to make adjustments, where we believe is appropriate, and we'll continue to do that in the future.

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Operator [6]

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We'll now take our next question from Steve Tanal of Goldman Sachs.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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I guess I just wanted to focus on the revenue per adjusted admission, the metric there and some of the drivers you called out. So forgive me for being specific here, but there's a few things that I wanted to touch on. The lapping of the $65 million of supplemental payments in the second quarter, was the expectation that, that would recur? I just don't remember that is as call-out last year. And just thinking through that, I think the size of that was maybe 60 bps or so. You framed 150 to 200 basis point delta versus recent trends on the metrics.

So is it sort of fair to say that the biggest driver within there was sort of commercial volumes? And any reason why that slowed, maybe how widespread it was? Just really trying to understand if that's just a function of sort of low unemployment, more macro-driven or if there's anything more specific you could tell us about that. And then finally, just an acuity mix read would be helpful. I don't know if I missed that, but those are the 3 parts to that question.

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [8]

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Yes. Thanks. Yes, let me start. So on the supplemental payments on there, we did not expect that to reoccur. We didn't call it out in '18 because it wasn't really an issue on a year-over-year basis because we had at least 2 of the 3 programs we mentioned in '17 and '18. As we went through our budget process, we knew those wouldn't reoccur, so they were not in internal plan as we went forward in 2019. So that's why the -- our internal plan, we weren't that far off with -- on our performance for the level.

On the managed care volume, as Sam mentioned, it's a handful of markets. We did see our commercial/surgical volume decline in that area, that did flow through on the acuity in a couple of service lines. But as Sam mentioned, we don't think that we see any structural or significant changes across the marketplace. So that influenced both the volume and the flow-through acuity related to that.

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Operator [9]

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And we'll now take our next question from A.J. Rice of Crédit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [10]

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Just wondering, picking up on Sam's comment toward the end there, a little more volatility from quarter-to-quarter. I mean that seems to be something we're seeing across the sector. Obviously, one of your major peers had the exact opposite of really strong -- really soft first quarter and a strong second quarter and surgeries were part of that. Do you think there's anything going on either with benefit design changes, I don't know, in terms of your managed care contracts?

People talk about their deductibles and high deductible plans and that having an impact on traditional seasonality. Is there any way you can look at the calendar that's -- I know the calendar is different in the way some of the holidays fell this year versus last year. Or is there anything that you think is creating a little more volatility from quarter-to-quarter, where you still end up at the same point for the year, but maybe the seasonal patterns are not what they used to be exactly?

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [11]

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A.J., this is Sam. I don't know that we have anything that would suggest the seasonal patterns are changing on us. I mean, we went through a period of time, as we've discussed on these calls, in the past where we felt there was some migration to outpatient procedures in the last part of the year because of deductibles and holidays and so forth. So we tend to see some outpatient surgical activity and procedure activity increase in the fourth quarter. But as it relates to the first half of the year, I don't know that we have any indications that seasonality factors are changing on us. I think my point was that the first quarter was incredibly good for HCA and had tremendous, like mid-teens same-stores growth if I remember correctly. And we just felt that we had a perfectly good quarter that yielded tremendous bottom line results.

And then we looked at the second quarter and it just didn't play out as we had anticipated entirely, not that far off as Bill indicated. And so when we sort of pull up and look at the business and then look at our markets, and we just completed our midyear reviews with our divisions, we feel pretty good about where we are on a year-to-date basis. And we think that's fairly reflective of our business and how it should play out over the remainder of the year. And so that's why we sort of called it out that way. But we will continue to study. We'll hopefully get a good indicator here in the third quarter and move through the year as we think. But there's nothing to suggest that seasonality has played into this in any material way.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [12]

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I think the managed care companies have pointed to an extra business day in the third quarter as a bit of headwind for them. Is that something -- is that enough to move the needle in your mind for you guys at all?

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [13]

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Well, clearly with an extra business day, we will have more procedures most likely because of that. So whether or not, over the course of the whole quarter that will have a material impact, we'll just have to wait and see. But our business days do influence our surgical activity and some of our procedure activities.

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Operator [14]

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And we'll now take our next question. It comes from Justin Lake of Wolfe Research.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [15]

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Sam, I appreciate the comments on the confidence in the second half EBITDA run rate. Given the weaker commercial volumes and acuity in the second quarter, I'm curious whether that confidence is a function of management expecting commercial trends to return to previous levels in the second half or whether you're driving cost improvements that will allow you to hit these numbers even if the commercial trends continue at those second half of -- or I should say, those second quarter levels.

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [16]

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Well, I would say it's a bit of a blend. It's not one or the other. I don't think the second quarter is necessarily reflective of commercial volumes. We've had, I think, 6 straight quarters where we've had adjusted admission growth in our commercial activity. I think 5 straight quarters heading into the second quarter, where we had inpatient commercial admission growth. So we don't necessarily see anything changing within the markets, as I've mentioned, that would suggest that the second quarter is the marker for us as we move forward. But when you do bump up our expectations for some rebound there plus some cost initiatives, where we think we have some incremental opportunities for improvement, those 2 combined, I think, Justin, give us a reasonable level of confidence as we look to the last half of the year.

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Justin Lake, Wolfe Research, LLC - MD & Senior Healthcare Services Analyst [17]

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Okay. If I can just squeeze in a quick number -- got it, guys.

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Operator [18]

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And we'll now take our next question from Ralph Giacobbe from Citi.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [19]

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Can you maybe call out the specific service lines, where you saw the pressure that drove the lower acuity? And then I think in past, you've given managed care revenue, I think, per admission. So hoping you can kind of give that for the second quarter. Then the last thing, just anything to call out on bad debt or collection rate that could maybe influence the revenue capture and pricing style in the quarter?

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [20]

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Yes, Ralph. Let me try to take some of those. When we look at the service lines, it was in some of our spine surgical procedures, orthopedics and some women services. We think on the orthopedic side on the commercial, we could have caught some of that as we moved into the outpatient area. But it's mainly in the spine and women services and, as Sam mentioned, spread among a handful of markets on there. On the collection rates, we're seeing any material change in our collection rates. We're -- our net days actually had declined on us for the year. So we continue to feel very comfortable with our revenue cycle operations. And the...

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [21]

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Net revenue per admission.

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [22]

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And the net revenue per admission for our commercial side was running 3.5% on a revenue per admission in the second quarter.

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Operator [23]

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And we'll now take our next question, Brian Tanquilut of Jefferies.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [24]

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Can you hear me?

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [25]

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Now we can.

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Brian Gil Tanquilut, Jefferies LLC, Research Division - Equity Analyst [26]

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Yes, just wanted to ask a question on price transparency. Obviously, CMS came out with a proposal yesterday. And how do you think that plays out? And where do you think HCA is positioned if that actually goes through in terms of pricing? And where do you stand in the markets that you operate in?

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [27]

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Yes. This is Bill. I'll make a stab at it. Obviously, it's still early. We just got that last night. We're still interpreting that. We've been on record that HCA supports price transparency. And we believe that's helping our patients gain a reasonable understanding and estimate of their cost prior to service. So we support those efforts. We'll have to see in implementation in terms of the specific procedures out there, our approach to complying with that. And we think HCA will continue to show good value. We don't know exactly where we stand relative to others in the marketplace. And we think that will create some opportunities, maybe some challenges there. But we think again the HCA system will stand up well on a price transparency view.

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [28]

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Yes. Let me just add to that, Bill, I think, a couple of things. Over the past 5 to 10 years, we have been on this journey to try to narrow the band amongst our payers so that there's not a large delta between the lowest payer and the highest payer. Now we have a delta, but it's not significant and we've narrowed it significantly over time. So that's point number one. Point number two, we think we are competitive in the marketplace. Otherwise, we would not be accomplishing contract renewals at the pace that we are. And for 2020, we're about 80% contracted. And for 2021, we're about 60% contracted at what I would call normal inflationary trends. Therefore, I believe we are generally competitive.

To Bill's point, there could be a market here or there where we're under a competitor. We believe that in a handful of cases. There could be a market here or there where maybe we're in a better position from a pricing standpoint. And we'll just have to sort that out over time. But at this point, we're focused on the patient and getting the patient the necessary information for them to understand their cost. So we're going to through this comment period that CMS has offered and make sure we push forward appropriate thoughts and appropriate ideas on dealing with the patient and then we'll determine whether or not there's an appropriate way to deal with other kind of pricing that is embedded in the proposed rule.

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Operator [29]

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And we now take our next question. It comes from Frank Morgan of RBC Capital Markets.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [30]

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Hate to keep beating this issue, but could you talk just a little bit maybe about, on the commercial volume side, how that progressed and tracked through the months of the second quarter? And then did you see any kind of change in that by the end of the quarter? And then just also want to confirm, no major losses of contracts, nothing went out of network during the quarter? And then any commentary around surprise billing and legislation?

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [31]

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Yes, Frank, let me try it. The quarter, you have to align, we mentioned before, around business days. April had a favorable business day. June, you had 1 less business day. So I am normalized for that. But I don't think we see any inter-quarterly trends of any material nature in the trends that we're talking about. Relative to surprise billing, I don't think there's any new developments out there. We've worked with various policymakers and industry leaders to express our views on surprise billing. And we'll see where that ultimately finalizes. But we don't think that's an issue for us in the near term as we look at various proposed legislation that's out there.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [32]

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Anything about out of network during the quarter?

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [33]

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No.

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [34]

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No.

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [35]

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We haven't lost any material contract or any material out-of-network activity.

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Operator [36]

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And we'll now take our next question. It comes from Josh Raskin of Nephron Research.

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Joshua Richard Raskin, Nephron Research LLC - Research Analyst [37]

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I understand you guys are saying it's not really a cost side of the issue. And I think I heard a couple of comments around labor. But maybe you could just flesh that out. Was there any increase in temporary labor? Are you seeing any shortages in specific markets, any specific lines, et cetera, that caused any potential changes in volume? Or is it really steady as she goes on the labor front?

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [38]

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I think it's pretty consistent. When we look at the overall labor trends, as I mentioned in my comments, Josh, our productivity improves. We improved just under 1% for the quarter. Our wage rates at 2.6% are in line with our expectations. Our temporary and contract labor has remained stable, a reason we're very proud of the efforts our operators are making on that front. And we're running nice turnover ratios in there. So again, when we step back and look at the cost trends when we manage on a per unit basis, they're very consistent with our trends. We recognize on a per -- as a percentage of revenue, they're showing some growth. But just as in the first quarter when you got really solid commercial growth, it helps the per revenue stats. And the opposite occurred in the second quarter. But when we look at how we're managing the cost on a volume basis, they're remaining relatively stable in our view across all categories, labor and supply, at that standpoint.

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Operator [39]

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And we'll now take our question. It comes from Whit Mayo of UBS.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [40]

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One quick clarification. Can you provide what state supplemental program actually changed and why it was different versus your expectation? And then my real question was just on the Houston market. I think you've recently come out of a rebranding initiative and announced a new affiliation with a large medical school. Just looking for any commentary on the market.

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [41]

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Yes. Whit, let me start. The 2 supplemental programs that were the drivers were our graduate medical education bonus program we had received that didn't recur. That was principally in Florida. And then we had a disproportionate share settlement that was principally going back to Colorado in some past years. So those were the 2 major programs. And then we got a little bit of change in our California supplemental that showed down in operating expenses. So those were the 3. The remaining programs, as we said, are -- we view as stable. And we think those issues are behind us. We don't see them creating a headwind going forward on there. And then relative to Houston market, Sam?

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [42]

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Yes. We're in our turnaround, I would say, in Houston. We struggled for a couple of years as we've called out on this call in the past. And I think this year, we have started our recovery, and we're seeing pretty good results from some of our initiatives to grow our business. We've seen some results with respect to consolidating some excess capacity. The new acquisition we did in the northeast -- northwest side of town is going to be a nice acquisition for us. So all in all, the branding, I think the repurposing of some assets, the focus that the team has put forth in that market is starting to show results.

We think the macros in Houston have turned a little bit, where we're starting to see job growth again and see a slightly better payer mix in that market than what we have seen historically. So we're pretty pleased with the first 6 months of the year's performance in Houston and believe some of the other initiatives strategically that we have in place, including branding, are going to be productive for us. The graduate medical education program that you speak to is in an early stage and has really not yielded anything yet. But we think over time, it will be a valuable program for us in the Houston market.

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Operator [43]

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And we'll now take our next question. It comes from Sarah James of Piper Jaffray.

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Sarah Elizabeth James, Piper Jaffray Companies, Research Division - Senior Research Analyst [44]

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I wanted to ask a bigger-picture question. So when you talk about seeing competition in the market, how exactly is it presenting today? So are you talking more from surgical referrals, branding or where you sit and ensures efficiency networks and how that presents to the consumer? So if you could give us some color on where the big competition is now in your industry, that would be helpful.

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [45]

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Well, I'll try to generalize it as best I can. Obviously, it's market-to-market and somewhat competitor-to-competitor. I think the unique thing about HCA, and we've mentioned this before, is we don't compete against the same systems from one market to the other. We believe fundamentally that creates competitive advantage for us as we look to deliver best practice solutions from one market to the other or allocate resources in a more timely manner. I think generally speaking, most of our competitors are trying to do a lot of what we're trying to do. They're trying to attract physicians. They're trying to create outpatient capabilities that are responsive to the markets and so forth.

And so I think from that standpoint, those are always won and lost, in my opinion, when it comes down to execution, when it comes down to detailing your business and your relationships with physicians and so forth and then really creating a compelling offering for the patient. And we think that's in HCA's wheelhouse. And so we have been about that for many years and we will continue to be about that. And we think it's that level of execution in such that ultimately delivers market share gains. Again, we are growing our market share on the inpatient side, as we've mentioned. We have actually grown our market share from a commercial standpoint.

We don't have the second quarter of 2019 yet. So we have fairly broad-based market share performance. When you look at the most recent available data, which is all of 2018, we had 2/3 of our markets grow their market share. The company in total is at an all-time high on both overall market share as well as commercial market share. So we think our approach to building out comprehensive and clinically capable networks that are easy to access for patients, very responsive to our physicians and produce a positive outcome for our payers, for our patients and others is yielding results, and we'll continue to focus on that and we'll continue to resource that as we move forward. And we think that's going to be a successful model for us.

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Operator [46]

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We'll now take our next question. It comes from Peter Costa of Wells Fargo.

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Peter Heinz Costa, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [47]

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My question is on same-store outpatient surgery cases. If I look at Q1, you're up 1.3%. This quarter, you're up 0.6%. Q1, you should have been negatively affected by the number of days. So this quarter, you would think it would be a little bit stronger. When I look at a year ago, you had a very strong quarter, up 2.6% in the second quarter. But you had an even stronger quarter in the third quarter for outpatient surgeries. So I'm kind of wondering, what happened last year in outpatient surgeries that's perhaps not happening this year, if that's the right way to look at it? And then will the problem be bigger in the third quarter?

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [48]

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So let me speak to outpatient surgery. This is Sam. So our hospital-based outpatient surgeries were up 1.9% in the quarter. Our ambulatory surgery center surgical volumes were down 0.6% and then our U.K. surgery volumes were down. And that influenced sort of the composite. But when you look at our hospital-based outpatient surgery up almost 2%. That's a pretty good number for us. Some of that was a migration from inpatient in a couple of service lines, as Bill alluded to. But it didn't influence, I think, the aggregate number in any significant way for the company.

In the ambulatory surgery center area, we actually categorize our surgical cases into 3 tiers, Tier 3 being the most significantly reimbursed; Tier 2 in the middle; and Tier 1 at the lowest. When you look at our Tier 1 volumes, they were down significantly. That's some ophthalmology cases, some pain cases and so forth. And that's what influenced the metric for the quarter. I don't recall the specifics in the second quarter of last year. But we feel pretty good about what we're doing with our surgical growth initiatives and our quality and investment initiatives inside of our ORs.

And we've had a fairly good pattern of growth over time. It does go up and down a little bit from 1 quarter to the other. Some of that could be calendar, some of it can be this transition that we spoke to. But generally speaking, we had a pretty good metric this quarter with our outpatient surgeries. Again, inpatient surgeries were the metric of concern for us. There were slightly down, flattish, if you will, domestically but down with international. And so that created a little bit of pressure. We'll have to continue to work on that and monitor that as we move forward. But all in all, our surgical activity on the outpatient side, I think, is yielding pretty good results for the company.

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Operator [49]

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And we'll now take our next question. It comes from Steven Valiquette of Barclays.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [50]

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So just sticking with the main topic of the day, I'm just curious, I mean, are you able to comment on whether the inpatient surgical volumes and/or revenue per admission are improving in early 3Q '19, just following the softer result in 2Q?

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [51]

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Yes, this is Bill, Steve. We do not comment on the current quarter. So we'll leave our comments to the period ending June 30 in the second quarter and year-to-date.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [52]

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Okay. Maybe just one quick question here around North Carolina. I mean there's been some headlines around the proposed state employee contract hospital rates for 2020. And the state wants to move to Medicare reference pricing. Obviously, hospitals do not want to do that. I'm just curious, first of all, I mean, how critical is that contract within North Carolina? If you are able to opine on it, is your bias to stay out of network? Or are you willing to potentially agree to Medicare reference rates, knowing that it could kind of filter into other contracts as well? Just curious to get your thoughts around that topic.

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [53]

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This is Bill, I'll try. I think I see the point. I don't know and I don't have any data in front of me to suggest that if we move to reference for the state employees that it would have a major impact on our North Carolina operations. But I do think from a precedent standpoint, we don't believe having government dictate fixed pricing, especially Medicare pricing, is an appropriate kind of response to managing health care demand. So I think that's where our focus will be on that topic. I don't view it will be a material issue to HCA as we run it up. And as we go through our 2020 planning, if it becomes an item, we'll disclose it. But I don't think at this point that particular issue will be a material issue for us.

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Operator [54]

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We'll now take our next question. It comes from Michael Newshel of Evercore. Michael, your line may be muted. We'll move on. We'll now take our next question from Gary Taylor of JPMorgan.

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Gary Paul Taylor, JP Morgan Chase & Co, Research Division - Analyst [55]

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Just asking this question certainly in the context that there is normal fluctuation between quarters. So I'm kind of beating the dead horse a little bit, but just maybe want to ask a slightly different way. When we look at net revenue per adjusted admission on a same-store basis, I mean, the comps do get a little tougher in 3Q and 4Q.

So Sam, when you talk about looking at this, analyzing the quarter, reaching a conclusion that there's not a concern with respect to second half guidance, how much of that is looking at the market-specific explanations for some of the commercial softness this quarter and being comfortable with whatever issue that might have been and the trajectory versus some of the new cost initiatives that you've talked about?

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Samuel N. Hazen, HCA Healthcare, Inc. - CEO & Director [56]

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Well, I answered that, I think, earlier. I don't remember who asked it, maybe Justin. But I do think we're not of the mind yet that our commercial volume growth is flattening out. Again, we've had 5 quarters in a row heading into the second quarter where we had inpatient admission growth on commercial activity and 6 quarters heading into the second quarter and now 7, if you count outpatient where we've had adjusted admission growth. And so we don't see anything again from a structural standpoint, whether it's payer, physician, competitor, what have you, that would suggest our trends should just immediately change.

As it relates to pricing trends as we sequentially move through the rest of the year, we do typically run about third quarter and second quarter very close and then we ramp up in the fourth quarter through normal contract provisions that we have and so forth. And we don't see anything at this particular point in time preventing us from being able to ramp up in the fourth quarter as we typically do. Obviously, some of our Medicare increases come through in the fourth quarter as well. As we mentioned earlier, we do have a calendar day advantage in the third quarter that tends to produce more commercial activity because of the type of volume we get typically from commercial activity. So there could be some influence there as we work through the quarter. So we're pretty confident in what I'll call the structural aspects of our business. And none of those issues suggest that anything has changed in any material fashion that would cause us concern. And that's why we're reiterating our confidence in our outlook for the rest of the year.

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Operator [57]

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And we'll now take our next question. It comes from Kevin Fischbeck of Bank of America.

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Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [58]

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Just wanted to kind of understand a little bit the rationale for the guidance raise. You mentioned that Q2 came in below expectations, and yet you're raising the guidance by $150 million. I assume it sounds like you're just saying that Q1 was so strong, you now feel comfortable with those trends. But just trying to understand, maybe a little more color about what exactly came into the guidance. Is there anything new in the second half of the year versus what you were expecting? And I guess we don't have the final regs. I don't know if DSH at all changed in assumption. But if there's any change in DSH in there, that would be helpful.

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [59]

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Yes, Kevin. This is Bill. Let me try to take that. After the first quarter, we fielded a lot of questions about our guidance adjustment that we made in the first quarter, which as you know, we raised our guidance after first quarter $100 million, which was primarily due to that favorable payer settlement we recorded in the first quarter. We indicated we typically wouldn't raise guidance further after just 1 quarter. But we did just for that settlement. So obviously, now the half year is behind us, what in essence we did was tighten our guidance by raising the previous low about $150 million, which obviously effectively raises the midpoint by $75 million.

So as we look at our year-to-date performance, it's an appropriate benchmark, we think, as we've said several times throughout the call for our full year guidance expectations. And if you look at year-to-date, once you adjust for the payer settlement for us, we've grown EBITDA just over 9%. And so our new midpoint suggests just over 9% growth for the second half of the year. And when you adjust for last year's insurance settlement and the Harvey settlement that we had. So we believe that tightening the guidance range after the second quarter, looking at the midpoint is really consistent with what our year-to-date trends. And so that was really what was behind the tightening and raising of the midpoint of our guidance after this quarter.

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Operator [60]

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Now we'll take our next question. It comes from Matthew Gillmor of Robert W. Baird.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [61]

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I wanted to ask about the contribution from recent acquisitions of Mission and the 2017 acquisitions contribute about 3% to EBITDA growth again this quarter. Or was that any different? And if you had any sort of general comments about how those deals are going, especially Mission and Savannah, that would be helpful.

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William B. Rutherford, HCA Healthcare, Inc. - Executive VP & CFO [62]

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Yes, this is Bill. Let me start. So we are very pleased with the performance of the acquisitions. And they did have a good quarter. As you mentioned, we anticipated them in our guidance to contribute about 3%. That's what they had in the first quarter. They ran stronger in the second quarter. Year-to-date, we're running about 4% contribution from our acquisitions. Mission, in particular, continues to perform very well. We're ahead of both our internal expectations and plan at Mission.

As did in Savannah, Savannah is progressing nicely and had nice growth in the quarter. So overall, the performance is very strong for the acquisition. I think when we look at the full year, we still think 3% to 4% contribution is probably a good number for all the acquisitions. And the Houston market is on track as well with our plans. We've made some adjustments in Houston. Our North Cypress acquisition in that market is performing very nicely. So overall, pleased with the performance of the acquisitions in the quarter and a little ahead of our expectations on a year-to-date basis.

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Operator [63]

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And we have no further questions at this time. So I'd like to hand the call back to our speakers.

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W. Mark Kimbrough, HCA Healthcare, Inc. - VP of IR [64]

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Okay. Listen, I want to thank everybody for joining us today, and I'll be around if anyone that wants to follow up. Thank you so much.

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Operator [65]

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This concludes today's call. Thank you for your participation. You may now disconnect.