HCA Healthcare, Inc. (HCA) Q2 2024 Earnings Report, Transcript and Summary

Welcome to the HCA Healthcare Second Quarter 2024 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir.

Good morning, and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen; and our CFO, Mike Marks. Sam and Mike will provide some prepared remarks, and then we'll take some questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements that are based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we may reference measures such as adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on adjusted EBITDA and reconciling net income attributable to HCA is included in today's release. This morning's call is being recorded, and a replay of the call will be available later today. With that, I'll now turn the call over to Sam.

All right. Thank you, Frank, and good morning to everyone. The Company's results for the second quarter were positive across the board and reflected strong demand for our services. In addition, our teams continue to execute our strategic plan effectively and produced positive outcomes for our patients, while also enhancing in our facilities, including better throughput and case management. I want to thank our HCA colleagues for their outstanding work and their continued pursuits to innovate and deliver on our mission. As compared to the prior year, diluted earnings per share as adjusted increased 28% to $5.50. Consistent with the first quarter, we saw broad-based volume growth across our markets and service lines. On a same facilities basis in the second quarter, inpatient admissions grew 5.8%, equivalent admissions grew 5.2%, emergency room visits increased 5.5%, inpatient surgeries were up 2.6%, outpatient surgery cases were down 2% and like the first quarter, the declines were mostly explained by lower volumes in Medicaid and self-pay categories. Similar to the past few quarters, other volume categories, including cardiac procedures and inpatient rehab services experienced strong growth. Payer mix improved year-over-year with commercial volumes representing 36.2% of equivalent admissions. And lastly, the acuity of our inpatient services as reflected in our case mix index increased slightly as compared to last year. These factors helped generate same-facility revenue growth of 10%. Also in the quarter, we progressed further on our cost agenda and produced solid operating margins. As we transition to the last half of 2024, we are encouraged by the Company's results. We believe the increased investments we are making in our people and facilities along with our disciplined approach to operations will continue to produce positive outcomes for our stakeholders. In closing, given our year-to-date performance and the backdrop of strong demand that we forecast for the remainder of the year, we have updated our guidance for the year, as indicated in our press release. With that, let me turn the call over to Mike for more details.

Thank you, Sam, and good morning, everyone. The second quarter showed continued solid performance with strong demand, improved margins and a balanced allocation of capital. Sam reviewed our top line results, so I will cover operating costs in the quarter. Operating costs were well managed, resulting in a margin improvement of 100 basis points to prior year and sequentially through the first quarter. Labor cost has improved 200 basis points from the prior year. And we continue to see good results in contract labor, which declined 25.7% from the prior year and represented 4.8% of total labor costs. Supply costs as a percent of revenues improved 50 basis points from the prior year. On other operating costs as a percent of revenue, they did grow compared to the prior year, but it remained relatively consistent for the past four quarters. We were encouraged that year-over-year same-facility professional fee costs growth moderated to approximately 13% in the second quarter, which compares favorably to the 20% increase we experienced in the first quarter. Adjusted EBITDA was $3.55 billion in the quarter, which represents a 16% increase over the prior year and included a modest benefit from Medicaid supplemental payments. As a management team, we are very pleased with the operational performance of the Company. Now moving to capital allocation. We continue to deploy a balanced strategy of allocating capital for long-term value creation. Cash flow from operations was just under $2 billion in the quarter, which is a decline of $500 million in the prior year, driven by income tax payments and timing of Medicaid supplemental program accruals and cash receipts. Capital expenditures totaled $1.28 billion, and we repurchased $1.37 billion of our outstanding share in the quarter. We also paid about $170 million in dividends. Our debt-to-adjusted EBITDA leverage remains near the low end of our stated guidance range, and we believe we are well positioned from a balance sheet perspective. Finally, in our release this morning, we are updating estimated guidance for 2024. For revenues, our new guidance range is $69.75 billion to $71.75 billion; net income attributable to HCA Healthcare, $5.675 billion to $5.975 billion; adjusted EBITDA, $13.75 billion to $14.25 billion; and diluted earnings per share, $21.60 to $22.80 per share. Based on the strength of our year-to-date results and our revised outlook, we estimate that share repurchases will be around $6 billion in 2024, subject to market conditions. With that, I'll turn the call over to you, Frank, for questions and answers.

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

[Operator Instructions] Our first question comes from A.J. Rice from UBS. Your line is now open.

Maybe just two areas that people are very focused on, supplemental payments. How is that running relative to your expectations? And in your back half comments, are you including anything for Tennessee? And then the other area being the public exchanges, what is the trend there year-to-year? And how much is growth in that helping for these strong results?

Thank you, A.J., this is Mike. I'll take the supplemental question. I think as you're aware, Medicaid has historically been our most challenging payer, really other than patients without insurances, typically paying us significantly below the cost of carrying for Medicaid patients. Over the last several years, most states in which we operate have implemented or enhanced Medicaid reimbursement through supplemental payment programs. And while these supplemental programs are growing, it is important to put them in context. They can be complex, variable in their impact from quarter-to-quarter and when taken together with historical Medicaid reimbursement are still well short of covering the cost to treat Medicaid patients. We believe it is important to understand this backdrop when discussing these programs. But now to the quarter. In the second quarter, we recognized a year-over-year earnings increase of approximately $125 million related to our Medicaid supplemental payment programs driven primarily by the new program in Nevada and the accrual of the Florida program, which began in the fourth quarter of 2023. To your specific question about the new program in Tennessee, we -- that is with CMS for review, and we do not anticipate financial impact from that program in 2024. If you want to go to the public exchanges. For the quarter, and let me just kind of give commercial volumes in general first and then we'll kind of break out it. But our equivalent admissions for managed care, including our health care exchange volumes were up 12.5% in this quarter versus the prior year quarter. If you take our managed care volumes without health care exchanges, they were up just short of 5% on equivalent admissions. And for health care exchanges, we were up 46% over prior year for the quarter.

Okay. Thanks a lot.

So, on the volume, I think as I mentioned and Mike alluded to there, I mean our Medicare volumes were up, I think by 6.5%. So, the volume was supported really across all payer categories. Clearly, the exchange and the enrollment over the last three years or so has become a bigger component of the business but still relatively small in comparison to the other payer classes. But nonetheless, we did see good volume across all payer classes with the Medicaid, I think being the only category that was down.

And Medicaid were down 10% on equivalent admissions, mostly related to Medicaid redeterminations.

Our next question comes from Ann Hynes from Mizuho Securities. Your line is now open.

We talk about SWB, it was down quarter sequentially, and it's usually flat. Is that just driven by contract labor improvements? And if you can give us just any details on temporary labor percentage total contract labor, things like that, that would be great.

Sure. Thanks, Ann. Contract labor was down 25.7% this quarter versus prior year quarter. As I noted in my opening comments, contract labor as a percentage of revenue -- I'm sorry, percentage of SWB was at 4.8% in the quarter. This compares to 6.8% in the second quarter of last year and almost 10% at the height of COVID in early 2022. So, we're continuing to see the improvements from all the work we're doing around recruiting and around retention, and that's paying the dividends in contract labor. If you think about kind of wage inflation, wage inflation was stable and kind of continues to run where we expected it to run. So also, we are pleased with our later results for the quarter.

And seasonally, we do tend to drop from the first quarter to the second quarter because some of the payroll taxes that we have to absorb in the first quarter are consumed by the end of the quarter or the early part of the second quarter, and that tends to improve a little bit of our metrics simply because of the timing of those tax payments.

Our next question comes from Pito Chickering from Deutsche Bank. Your line is now open.

Can you bridge us to the back half EBITDA raise for this year? What percent of the upside you're changing is coming from better volumes? What percent is coming from changes to pricing mix or acuity? And then, how is just coming from just better margin improvement coming from labor? And then finally, are there any changes to supplemental assumptions for the back half of the year versus original guidance?

So, we're obviously really pleased with our year-to-date due performance. It kind of sets our thinking about the back half of the year. On the top line, our volume and payer mix for the first six months of this year were better than our original expectations. Solid labor management, as we just talked about, including the contract labor declines also contributed to our thinking around the kind of our results. As we move into the back half of the year, we believe most of these trends should continue. We anticipate volume growth to be in the 4% to 6% range for the year. We expect salary wages and benefits supplies and other operating expenses as a percent of revenue to run mostly where we did June year-to-date. Contract labor as a percentage of salary wage and benefits is projected to be in roughly in the mid-4% range in the back half of 2024. And we do expect professional fee expense growth to the prior year to moderate a bit more in the back half of 2024 as well. Specifically, on Medicaid supplemental payments, as you recall in our original guidance, we anticipate a headwind of $100 million to $200 million from the Medicaid supplemental programs. As we've noted previously, these programs are complex and have a lot of variability quarter-to-quarter. But given that we are now deeper into 2024 and have better visibility into the programs across our states, we now anticipate an approximate $100 million to $200 million tailwind in 2024 from Medicaid supplemental payment programs, most of which occurred in the first half of 2024.

Our next question comes from Brian Tanquilut from Jefferies. Your line is now open.

Congrats on solid quarter. Maybe, Sam, just as we think about -- you called out Medicaid with the redetermination kind of dragging in volumes a little bit here. But still very, very good performance. So just curious where you stand now as you think about the sustainability of this elevated utilization trend.

Well, as Mike just mentioned, Brian, we do expect that these volume trends will continue throughout 2024. And we have had for -- including 2023, really solid volume growth. I think when we pull up and we look at volume for the Company and overall demand for our services, it starts with the markets that we serve. We are in markets, as we indicated at our Investor Day, that we think have solid characteristics that are going to support organic growth. That's the first thing. The second thing is the HCA network way. And that is how we build our network, how we execute inside of that. Our inpatient bed capacity is up 2% year-over-year. When you look at across all of our facilities, we've added a few hospitals in that as well, really small ones that are complementary. Our outpatient facilities overall are up 5%. So, our network development is a key part of our growth. And we think it's part and parcel to our ability to grow our market share, which we have grown, and we continue to see metrics that suggest our market share continues to be positive. The third thing for us is capital. We are investing heavily in who we are. We're investing in our network. We're investing in our people. We're investing in clinical technology for our physicians. And we're finding ways to use our capital to make our services better and produce better outcomes for our patients. So, this year, we'll invest somewhere around $5.2 billion, which is significantly up over the last couple of years, and we continue to see opportunities inside of our organization to invest capital. The next area, it's hard for us to know this, but we do believe that coverage -- when people are covered whether it's through the exchanges mostly, through their employers, through Medicare, they tend to purchase services. And so, coverage is up. So that helps elevate demand. And we are in really unchartered territories for growth in demand in a normal environment. And it's hard to know if there's a hangover from COVID, as we've mentioned in past calls and so forth, but we do believe the fundamental attributes of coverage help support demand growth. And then when you start looking across like we said earlier, the different payer classes, it's broad-based. It's broad-based across the different payers. It's broad-based across our services. I mean even obstetrics was up slightly in the quarter. So, we have seen just sort of a lift across all aspects of our business. And again, the diversification of HCA from market to market as well as the diversification from service allows us to participate in this demand growth, and we're pretty encouraged by what we see year-to-date and what we expect over the balance of this year.

Our next question comes from Ben Hendrix from RBC Capital Markets. Your line is now open.

I was wondering if you could comment a little bit more on the sources of acuity strength that you continue to see when parse that out between maybe the two midnight rule investments and higher acuity capabilities, or if there's like we heard some MCOs talk about higher acuity and continuing Medicaid book and then maybe even some pull-through -- pull-forward of acuity ahead of members being redetermined off. So, I just wanted to get any indication of kind of where you're seeing that acuity growth.

Well, this is Sam. Let me speak to our core strategy. And our core strategy is to create sort of a one stock capability within our systems. And by that, I mean, the ability to take care of a patient's need regardless of what their condition happens to be. So we, over time, have built complexity in the services that we've offered. So we've enhanced trauma programs. We've enhanced transplant programs. We've enhanced neonatal services. We've opened up our infrastructure with our transfer centers with helicopters, with ground transportation. We've interacted with the rural community in a way that support health care needs there, which typically tends to be more acute care service requirements than not. And so, all of that has been part and parcel toward our network strategy over the years. I will tell you, again, we had broad-based service growth in trauma in the number of ambulance deliveries that occurred at our hospitals, our cardiac care. Our cardiac surgery was up. So, we had -- neonatal admissions were up. All of these components that I mentioned that are essential to our network strategy saw growth. And so that has naturally lifted the case mix and the acuity of the patients that we serve. The two mid-night rule is actually dilutive when it comes to our case mix on the inpatient side. So, we jumped over the implications of the two midnight rules because those are lower acute patients deserve -- deserving to be in an inpatient status, but none the less than average equity by comparison. So, our quarter suggests that the acuity and the complexity of the services that we offer is even more than what it reports out simply because of the dilutive effect of the two mid-night rule.

Our next question comes from Justin Lake of Wolfe Research. Your line is now open.

Sam, wanted to get your view on one of the bigger questions we're all getting from investors heading into the election, which is the potential for exchange disruption should the enhanced subsidies be allowed to expire at the end of 2025. Has the Company run a scenario analysis of what happens to these volumes and hospital economics should those subsidies expire? And if not, maybe you could just share with us what you think happens to those patients in terms of coverage, who might drop from the exchanges? Do they become uninsured? Do you think they move to other payer types? And then if I could just squeeze in a numbers question. Can you tell us what same-store ASC revenue growth was in the quarter?

On the exchanges, Justin obviously, there's a lot to play out here politically between now and the end of the year. So, it's a little premature for us to forecast what's going to happen politically with respect to the exchanges. It's no secret that they are scheduled to expire at the end of 2025. And many of the participants are in states that we serve, obviously, you've all seen that in the data that's available. We don't have a great line of sight on which participants in the exchange at what level of subsidies and how that will play out. It's really difficult for us to know precisely what that is. We are starting to try to study as much -- study. And we're hopeful that in 2025, we'll have some sense of the policies that might be put forth a better sense of the economics around the exposure if the subsidies go away. But at this point in time, it's way too early for us make any judgments on that. But we will be as transparent as we possibly can be with you all around it once we have information that we feel we can support and share appropriately.

On same-store ASC revenue growth is about 8%.

Our next question comes from Whit Mayo from Leerink Partners. Your line is now open.

Sam, you've talked a lot in recent quarters around the efficiencies and the throughput initiatives that you've had in the ER. Any numbers that you can share around any of those productivity gains that puts this in perspective, maybe we see it on the back end with length of stay? And just if you could comment on the commercial growth in the ER this quarter.

Okay. Let me start with the commercial ER growth. Our commercial volumes in the emergency grew almost 18%. So really strong growth in that category. Again, we are focused on throughput, patient satisfaction and high clinical performance with what we call our ER revitalization program. And our ER revitalization program has produced positive results for us. Our throughput, let's start with time to see a patient, is down two minutes. That didn't sound like that much. Well, we're moving from 11 to 9 minutes. That's the starting point. Our length of stay for patients who have been discharged is down, I think, about 15% to 20% to around 160 minutes or something in that zone. Again, throughput, getting the patient through the systems, communicating with them effectively and then getting them out when they're ready to be out. Then we have patients who are admitted. For those patients, we've also improved the hold time in the emergency room, so we can get them up to a floor and in a proper setting for care. And that also has improved markedly on a year-over-year basis. We have room to go. And we're continuing to invest in our leadership development. We're continuing to invest in technology. We put our care transformation and innovation team inside of our ER processes to help them think about different approaches. Our patient satisfaction has improved in our emergency room. And I want to say over 8 out of 10 patients would highly recommend or recommend an HCA emergency room. In addition to that, we're adding capacity. We've added capacity on our hospital campuses, but we've also added capacity off campus to really meet the needs of different communities and that's been part of our growth as well. We continue to invest in both aspects from a supply standpoint. And then we're investing heavily in our process standpoint to make sure that we're delivering the searches that our communities need and that our patients deserve. And I'm really proud of the effort that our teams have put forth.

Our next question comes from Andrew Mok from Barclays. Your line is now open.

One clarification and a question. First, can you just give us the exchange admissions as a percentage of total in the quarter? And then on the question, outpatient surgeries were down about 2%. Can you elaborate on some of the trends you're seeing there? Maybe break that out between hospital outpatient and ASC volumes?

Yes. So, on the exchange volumes, they're just right at 7% of admissions and ER visits as well for exchange as a percent of total. What was the second question?

It was on outpatient surgery. Yes, I got it, right. So we were down in the quarter, 2% in the hospital on the same -- we back up, that's not same store here, sorry. Yes, we're a little over 2% on same stores and a little over 1% on ASCs. And that weighted out to about the 2% that we mentioned. Again, it's exclusively in Medicaid and uninsured. So, our overall revenue growth in our ASC and hospital outpatient surgery platform was up. Our profitability on that segment was up. And yes, we have a volume metric that's down, but the implications to our business really aren't there as a result of it.

Our next question comes from Stephen Baxter from Wells Fargo. Your line is now open.

Just a couple more on the guidance. I was hoping to hear if you've updated your thinking on core wage inflation as part of this guidance revision. I'm wondering if that contributor potentially not due to the higher volumes you're staffing to. And then if there's any impact of M&A and the guidance [indiscernible] revenue and EBITDA that would be great to now too.

If you look at wage inflation, as we kind of came in this year, we were thinking that 2.5% to 3% range, and that stays consistent as we think about where we are here and how we're going to kind of close to the back half of the year. So as -- thinking wage inflation will be fairly steady.

And then there's one on M&A.

So, there were some questions on M&A. Let me just kind of run through that. So, you have $400 million of revenue in new stores. About $250 million of that is from Valesco. The rest are from the acquisitions in Texas, you heard us talk about the Wise Healthcare System acquisition couple of others. And that's the revenue side of that. It was dilutive to earnings, though and about 1% negative impact to EBITDA for the quarter. So, the M&A trends don't really impact or did not really impact our year-over-year EBITDA growth in any material way.

Our next question comes from Scott Fidel from Stephens. Your line is now open.

I was hoping to just circle back on the Medicaid supplemental payments. And maybe if you can just sort of talk about how your Medicaid margins have evolved from maybe where they were a couple of years ago to where they are currently inclusive of the Medicaid supplemental payments. I know that you had mentioned how this is really just trying to get the business still on Medicaid back closer to breakeven or maybe not even there yet. So helpful if you could sort of walk us through that? And then just looking out to the elections, there is a level of investor uncertainty around the sustainability of Medicaid supplemental payments, if there was a switch in the White House, although I do think it's notable that we do see many of the states that are sponsoring these payments are from red states. So, it feels like these payments slightly would be quite sustainable. But there is a lot of investor uncertainty around this topic. So, we certainly appreciate your thinking on that.

Yes, thank you. I'll take the second one first. We do see good sustainability around the Medicaid supplemental payment programs. As you noted, they're well supported historically, both in red states and blue states. And frankly, two of our biggest programs are in Texas, Florida. So that will give you a sense of those things. The new rule that came out earlier this year on sustainable programs, Medicaid supplemental programs, we found to be positive and supportive and actually good for the provider industry. If you think about kind of margins over time, if you go historically back in time, the Medicaid margins -- and you're right, I mean, supplemental payments are really just core to Medicaid, they were pretty significantly below the cost of caring for Medicaid patients in the past. Over the last several years, they have grown some and more states have added programs or enhanced programs. But even now, if you look at where we are in 2024, and you think about the historical base Medicaid reimbursement plus the supplemental payment reimbursement, it's still pretty well short of the cost of caring for those patients. So that's the context that we would provide on that.

Our next question comes from Jason Cassorla from Citigroup. Your line is now open.

Just wanted to ask on CapEx. It sounds like you're maintaining your outlook there, but just in context of the higher 2024 revenue and EBITDA outlook. I just I guess curious if there's anything to call out on the CapEx side. And apologies if I missed this, but it sounds like maybe perhaps you're expecting to use the excess free cash flow from the guide raise just for share repurchase, or how should we think about that?

We are not really revising our CapEx. As we started the year, we talked about $5.1 billion to $5.2 billion. We think it's still going to generally be in that same range. As noted in our comments, we do expect based on the improved outlook and the updated guidance that we're going to spend about $6 billion in 2024 on share repurchase. So, the bulk of the increase from the improved results would be going towards share repurchase.

Let me add, Mike, if I may, it's Sam, to the capital. I think it's important to understand that we operate on an inpatient occupancy level in the mid -- low to mid-70s even in the second quarter, which is in addition to the fact that we added 2% inpatient bed as I mentioned. So our inpatient occupancy continues to grow, reflecting the acuity of our patients, reflecting the overall demand and reflecting the market share gains that we believe we're experiencing. The second piece is our ambulatory network development. Again, we have about 2,600 outpatient facilities and clinics across the Company, up 5% from where it was last year. Those are a component of our capital spending as well. And we will continue to look for opportunities from one market to the other to build out a network that serves our patients as we need to serve them. And the third piece is infrastructure. I mean we are in an infrastructure business. It requires us to have facilities that have the appropriate environment for our patients. We have to upgrade basic elements of those facilities and so forth. And so, a lot of that is maintenance. So, half of our capital goes towards maintenance to keep our facilities where they need to be. And then the last thing for us is technology. We are investing more in our technology agenda because we see opportunities for it to support the Company's next-generation growth and allow us to serve our patients even better. So, our technology component of our CapEx continues to grow. All of this is in the backdrop of our long-term view on demand. As we indicated in November at our Investor Day, we expect long-term demand to be in that 2% to 3% zone as well. And so, we have to build the necessary capabilities in our networks in our facilities to be able to serve that demand, and that's where our capital expenditure plan is intended to accomplish.

Sam, let me clarify real quick. I said $5.1 billion to $5.2 billion. It's actually $5.1 billion to $5.3 billion in capital spending for 2024.

Our next question comes from Kevin Fischbeck from Bank of America. Your line is now open.

It sounds like you believe that the volume and the demand support this volume as a kind of a base for the future. I wanted to see if you could give a little color on the margin side of things. Is this the right way to be thinking about the base when we think about ex year? Is there anything puts or takes that you would point to? I know sometimes when volume comes in stronger than you plan for, maybe there's a little bit more margin leverage than you would expect, and maybe that might moderate or whether you mentioned the timing in the past about some of -- payments. Is there any obvious headwind from timing from this year into next year we should be thinking about as we think about margins and EBITDA sustainability? Is this a good base for thinking about next year's growth?

We aren't going, Kevin, this is Sam, speak to 2025. I will tell you that we do not have any unusual event thus far through the first six months this year. This is core operations. And as Mike said, slightly by the Medicaid supplemental programs. So as sort of a core operational level of performance, it's really quite plain by comparison to some of the choppiness that naturally occurs with COVID, with the supplemental payment timings and so forth, with some of the challenges we experienced last year with just the inheritance of Valesco and so forth. But when we look at the first six months, and we think about the balance of the year, this is really a solid operational performance, supported by strong volume and not really unusual items benefiting or dragging the business in any material right. That's how I'd answer that question.

Our next question comes from Ryan Langston from TD Cowen. Your line is now open.

Just want to go back to labor for a second. Obviously, impressive results. Is there anything particular in recent achievements driving these results, maybe pass throughput and length of stay reduction and maybe how to think about that carrying forward over the next few quarters? And then just there is some potential M&A larger deals in the market, both on the hospital and the ambulatory side. Understand end market tends to be where you focus. But can you maybe just remind us of the parameters that you would need to entertain maybe a more larger market or national expansion?

Yes. So labor, as we've already said, the biggest driver, if you think about our performance in the first half of the year compared to prior year was this reduction in contract labor. And that kind of comes through all the work we've been doing over the last several years, improving our recruitment activities and really working on retention. On the recruitment side, you've heard us talk about our academic affiliation work, our work around the Galen School of Nursing. And all of that has kind of produced improved supply of nursing into our markets, which has been super beneficial. I do think from a contract labor perspective, we're -- as I noted in my comments, we're down to 4.8% of contract labor as a percentage of salary wages and benefits. And I do think that the go-forward improvement, we'll still have some. We've guided, as you've noted from my comment on guidance that we think we'll run probably in the mid-4 range in the back half of the year. So, there's some improvement in the future. But I think the big move on contract labor from the highs of COVID really have been reflected now and what's to come is more incremental improvement as we continue to work on recruiting and retention. So that would be my -- I don't see anything other than that. It's material related to driving our labor trends. I mean productivity remains good. Wage inflation has been stable especially kind of coming off COVID and into 2024. So, those are the major things that we think about when we think about from now to the back half of the year.

And Mike, let me just put a wraparound that. I mean our focus now is finding ways to help our employees succeed even more at what they do. So, we are investing in education of our existing workforce just as much as we're investing in education and new nurses and so forth. We are improving our processes around supporting our caregivers so they can deliver better care. So, we have a number of initiatives that are connected to our nursing operations and so forth that really make sure that we have resources and support for our caregivers on a day in and day out basis. And we're investing heavily in our leadership because good leaders produce good outcomes for our patients and good outcomes for the organization. So those things are wraparounds to what Mike just alluded to. With respect to M&A, we have added to our platform this year with some tuck-in acquisitions from one market to the other. And Texas, as Mike alluded to, we added a number of hospitals to our North Texas market, small but very complementary. And we're starting to see good results out of them. In Houston, as an example, we added an outpatient business to our network there. That has produced a very good outcome. We are built to be bigger. We know that, and we have the balance sheet to support that. But we're very selective around making sure that an acquisition fits the model and can produce the returns that we expect from acquisitions. Will we enter new markets? Hopefully, yes, but those opportunities haven't necessarily presented themselves. I don't know that we'll deviate from our model. Our model is more centered on making our system -- our local system works better, work better for the community, work better for our patients and work better for other stakeholders that are connected to it. We obviously could do that, but we don't think that's the best answer for the Company. And that's been part of what we define as the durability of HCA Healthcare. It's staying true to the model in ways that produce a really good outcome for our stakeholders. It's possible that something will cause us to deviate from that, but we haven't really seen it up to this point. So, our focus is on investing back in our business, doing selective strategic acquisitions that complement our networks where we can and really advancing our position in these great markets that we serve.

And one more comment on labor. The other thing that was very helpful for us in the -- not only in the quarter, but year-to-date is this 2% reduction length of stay. So, if you think about kind of how did we service almost 6% growth in inpatient volume on the admission side, 2% reduction length of stay. Sam mentioned this, we had a percent increase in our bed count from our capital investment program and then our occupancy levels were up 2%. But that 2% drop in length of stay and the ER efficiency that Sam mentioned earlier also supports our labor costs and the efficiency in the way we're managing our labor. So, I wanted to add that as well.

Our next question comes from John Ransom from Raymond James. Your line is now open.

Great job. Just curious, a question we're getting is, if you look at the back half, do you happen to have the DPP compare of '23 versus '24 in your back half?

Here's what I would say about the guidance on the back half year. We talked about when we came this year that we thought we would have a headwind of $100 million, $200 million for Medicaid supplemental payment programs. As we've gotten deeper into this year, we're now kind of changing that or updating that to a $100 million to $200 million tailwind. So, if you think about that flip of $200 million to $400 million, I would tell you that much of that already occurred in the first half of '24. So, if you think about the back half of '24, what we're expecting for supplemental payment programs will look pretty similar to what we had in the back half of 2023.

Okay. And if I could just sneak one more. M&A, what is the year-over-year M&A contribution to EBITDA? Because it looks like in your cash flows, M&A has been quite modest, but it looks a little bigger in your table. So, can we kind of -- and was that fully in your guide, the M&A effect when you guided for '24?

It is. I mean, as I said earlier, if I think about M&A or another way to think of that is kind of new stores. It was -- for the second quarter is about a 1% dilution to EBITDA for the quarter in terms of the impact from M&A activity. That includes, by the way, Valesco. I mean I would note that Valesco moves into same-store in 2025 and so you'll see us kind of stop talking about Valesco next year. But that M&A was not a material impact related to our earnings for the quarter.

And Mike, as it moves through the last half of the year, it gets slightly better. And we're hopeful that by the end of the fourth quarter, it's not dilutive.

Our next question comes from Joshua Raskin from Nephron Research. Your line is now open.

Just getting back to the exchanges. I heard 7% of admissions now are coming from patients with ACA exchange coverage. What does that translate into revenues? And should we assume that those patients carry margins that are typical of the broader commercial population?

What we typically say about our health care exchange payer category, it's our second-best payer. It's below -- from a reimbursement level, it's below commercial. It's above Medicare. So, it's in between those. So, it would have margins less than your typical commercial margins, but better than Medicare would be roughly what we're talking about. So, on 7% of admissions, if you look at revenue, something like 9% of revenues.

Our next question comes from Sarah James of Cantor Fitzgerald. Your line is now open.

Can you give us some clarity if the commercial outpatient surgeries that were related to holidays in 1Q were rebooked? And then just taking a step back, if I look at outpatient surgical trends, first half last year was kind of mid-single-digit. Redetermination started and it dropped down to low single digits. Now, it's a negative 2% for first half of this year. So, is that like full change from the mid-single-digit first half last year to now be negative too, all related to Medicaid? And should we start to see that fall off in the back half of this year then as we start to anniversary some of the impacts?

Again, the volume declines on outpatient surgery are associated with Medicaid declines in that category as well as uninsured self-pay categories. So, both of those categories explained year-to-date, pretty much 100% of volume declines. I mean, there's a thesis inside of our company. It's not proven yet, that patients who migrated from Medicaid into the exchanges through the redetermination process, maybe in a different seasonality category with respect to when they access services. So that's a theory we have. We'll have to see how that plays out as we move through the balance of the year. But I think it's important to understand that the revenue growth -- the service level growth that we've seen in our outpatient surgery business has been solid and produced a pretty good financial outcome for the Company. And if, in fact, our thesis is accurate, it should be better in the second half of the year than the first half of the year. But again, we don't know that for sure. We need to experience this change in our business with this movement from one payer class to the other before we can land on that being the situation.

Sarah, I would just add on Medicaid redeterminations. We're about one year into the redetermination process in most of our states. But you remember from last year, really started gaining speed towards the end of last year. So, I don't think you'll sunset or anniversary you're into the full Medicaid year-over-year comparison period until you get closer to the end of the year.

This now concludes our question-and-answer session. I'd now like to hand back over to Mr. Frank Morgan for final remarks. Thank you.

Ellie, thank you so much for your help today, and thanks to everyone for joining our call. We hope you have a great week and a successful earnings season. I'm around this afternoon, if I can answer any additional questions you might have. Thank you.

Thank you, everyone, for attending today's conference call. You may now disconnect. Have a wonderful day.