EFTA01453041.pdf

4 February 2014 Health Care Facilities and Services HCA Holdings, Inc. Q4'2013 Earnings Review Key points • Solid results despite challenging volume backdrop. Q4 EBITDA was HCA's O4 E8ITOA growth previewed earlier in January, so the real news in 04 results was more (+6.7% YoY) is very detail on operating metrics and HCA's outlook. In the context of a very respectable and reflects weak volume environment, HCA's 04 EBITDA growth (+6.7% YoY) is very strong expense management respectable and reflects strong expense management and improving and improving priangimix pricing/mix. • We are particularly encouraged by HCA's recent quarterly surgical trends (see Figure 3). While 04 same-store inpatient admissions and adjusted admissions dipped 1.8% and 1.0% YoY, respectively, HCA's 04 SS We believe any sustained surgeries improved +1.4% YoY (+1.6% outpatient surgery / +0.9% trend in surgical volume could inpatient surgery) and helped drive revenue per adjusted admissions represent an upside risk to (RPAA) pricing growth of +4.8% YoY. This marks the third consecutive 2014 guidance quarter of improving surgeries, and we believe any sustained trend in surgical volume could represent an upside risk to 2014 guidance. DB's Hospital Volume survey has picked up recent strength in surgeries, too. • 2014 guidance seems like a reasonable, but conservative starting point. Adjusting for certain non- HCA guided for EBITDA of $6.6-$6.85 billion (vs. consensus of $6.82 operating headwinds and billion). Guidance reflects SS revenue growth of 3%-5% (vol 1-2% / ACA HCA's 2014 guidance pricing/mix 2-3%), flat margins and -300 bps of EBITDA growth assumes organic/base growth headwinds from lower HITECH and higher stock-based comp. ACA adds of -2% to -5% growth -1.5% to growth (at the mid-point) or -5100M. Organic/base growth works out to be -2% to -5% growth adjusting for the headwinds and ACA. • Framework for ACA impact still evolving, with lots of moving parts to HCA's 2014 outlook assumes HCA's key assumptions. HCA's 2014 outlook assumes ACA benefit of I - ACA benefit of 1-2% of 2% of EBITDA (565M-$135M), although it is back-half (03/Q4) weighted. EBITDA ($65M-$135A41. HCA said it would re-visit its key assumptions by mid-year at the earliest, although it is badc-haff but its high-level base case is for 7.9% reduction in uninsured, but partially (O3/O4) weighted offset by declines in pricing/volume from exchange mix. The key variables that HCA is tracking for its reform model are: (1) enrollment figures for exchanges and Medicaid expansion; (2) the proportion of enrollment that is net newly insured; (3) health plan selection (metallic), network design and network participation for the exchanges; and (4) out-of-network activity. Our sense is that the offsets built into HCA's model could prove conservative given the strength of its networks (i.e. less impact from narrow network if its access points such as ED are more convenient). Given the slow ramp of exchange enrollment in key markets (FL / TX) and HCA's lower exposure to Medicaid expansion states, we believe 7-9% reduction of uninsured patient mix seems like a reasonable starting point. • Reiterate Buy rating / $58 price target. We see HCA as a best-in-class operator with strong assets, a flexible balance sheet and a good track record for opportunistic capital deployment. Deutsche Bank Securities Inc. Page 3 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0110433 CONFIDENTIAL SDNY_GM_00256617 EFTA01453041