Community Health Systems, Inc. (CYH) Earnings Call Transcript & Summary

Good afternoon, and welcome to the afternoon session of day 2 of the RBC Virtual Healthcare Conference. This afternoon, we'll be kicking it off with Community Health Systems. With us today, we have CEO, Tim Hingtgen; CFO, Kevin Hammons; and IR Head, Ross Comeaux. Welcome, gentlemen.

Great. Thank you. Glad to be here, Frank.

Sure. I think Community is an interesting story, been through a lot over the last couple of years and looks -- things look very promising from here.

But I'm just wondering, could you compare and contrast your portfolio today versus where you were, say, back in 2015? Obviously, a lot has changed, but maybe tell us about how you think your portfolio is positioned today for the future of health care.

Yes, Frank, I look forward to jumping into that with you. I'm going to have my disclaimer statement here real quick, just to make sure everyone knows kind of everything we're going to talk about. We want to make sure we're on the up and up here.

Yes. Thanks, Frank, for hosting us virtually again this year. Before we begin, I'd like to quickly mention that some of our comments today may include forward-looking statements. So we would encourage everyone to read our risk factors in our SEC filings.

That was easy. Thanks, Ross. I appreciate it. And again, I do appreciate the question, Frank. It's great to be here with you and everyone attending today. We have, as you said, worked through a lot of the last couple of years, and we're pretty pleased with where we're sitting today, even with the COVID pandemic still in our lens. But really working through a lot of the issues and opportunities that we see in front of us. You mentioned the portfolio, taking a look at where we were to where we're at today. We've been going through some very deliberate repositioning of the portfolio, asset sales. Certainly has some benefits from a capital structure standpoint and deleveraging. But we really also did this with a very strategic lens. And again, very pleased with where we're sitting today, by and large, completing the divestiture program last year. So now we're 110% focused on the go-forward, build-out-of-our-core portfolio. To kind of look back to where we were, we had roughly 200 hospitals at 28 states in 2015, about $19 billion in revenue. And just to remind everyone, a very small net revenue growth rate on that portfolio. Go to where we're at right now, 84 hospitals in 16 states, about $12 billion of annualized net revenue. Growing in a mid-single net revenue growth rate. So we're really pleased again to see that trajectory improve. Even before the COVID pandemic, I think it's important to point out, the smaller core group of hospitals meeting with some divestitures left in the mix, we were posting some solid EBITDA gains and margin improvement. In the third and fourth quarter of 2019, January and February of 2020, pre-pandemic, we were, again, still showing some of that strength of the underlying mix of hospitals in the CHS portfolio. So I think that's a good level set. In terms of where we take it from here, we basically have 3 prongs of where we go. Obviously, completing that divestiture program was key. As I said, now, really focused on growing the core assets in our family of hospitals. With these hospitals, we're in better markets. The majority are in the sunbelt states, better demographics, population growth, all the things that we know are important to, frankly, securing a solid health care future. Again, stronger margin profiles, as I just pointed out just a few moments ago that we're demonstrating even before the pandemic. And then excluding the CARES Act moneys in the first quarter, we reported that we had a 6% EBITDA improvement, adjusted EBITDA improvement, and that's with 21 fewer hospitals year-over-year. So again, just speaks to the fact that, that divestiture program was key to our long-term success strategies. The second factor, our investments in that core portfolio -- developing that core asset base with some really key strategic initiatives that I think we've done a pretty good job of walking you through every quarter through our earnings call. That's our transfer centers. The deployment of that important strategic initiative, our ACOs, our consumerism or connected care strategies, investing in primary care and access points, service lines and acuity. Layering that onto the stronger core asset base is really, again, a key strategy for us. And then our next step would be the balanced growth focus we have in terms of inpatient care and outpatient care. Where we put our capital, we call it being capital smart, understanding that we have opportunities in these markets. To grow both our inpatient facilities, do in large part due to the insights we have from our transfer center strategy. We've added beds. We've added surgery suites. We've been able to grow this core asset base. And then on the outpatient side, we've added a lot of access points, whether that be ASCs, urgent cares, primary care practices, specialty practice locations. We have over 1,300 access points across our roughly 60 markets right now. So it's a pretty good spread. Again, showing that core focus -- I'm sorry, that balanced focus on core asset growth. We've also invested in some de novo hospitals, which is a new strategy for us in these markets. We opened up a new micro hospital in Tucson in November of last year. Opening up some replacement hospitals. We did La Porte last year. We had Fort Wayne replacement hospital for the downtown facility taking place later this year. And again, really excited that we have our larger acute care, our fourth asset grow -- opening up in Tucson later this year or first quarter of 2022. So again, just looking at how we strategically develop out this robust portfolio with better markets is, again, really our forward-looking growth story.

Got you. I know when you exit a lot of those smaller markets, I mean, you're going from a sole -- generally speaking, you're a sole community hospital provider in those markets. So not so much direct competition, maybe indirect competition for out-migration. But how do you feel of this group of core hospitals, the 84 core hospitals that you have today? How well do you think from a competitive standpoint, now that you're in bigger markets, you're not the only hospital there? Maybe give us a little color on how do you feel like you're positioned competitively? And if there's such a thing as an average in terms of where you are in those markets from a market share standpoint?

Yes. That's, again, a great question. And obviously, when we were repositioning the portfolio, understanding that we're looking at more, let's say, small and mid-sized metropolitan markets. Obviously, that does, in general, mean there's more competition. We believe we certainly had the skills and the experience in more competitive markets as operators leading the company. So not worried about basically having the acumen to make it happen. We have the strategies, we have the capital, we have the structure. All those things, I think, position us very well. And then layer on to that, all of the initiatives I just mentioned a few moments ago, transfer centers, so that our larger hospitals in these larger markets can take in patients from CHS-affiliated hospitals or non-CHS hospitals with lower capabilities in terms of serving their communities, bring those into our hospitals. All that positions us very well for long-term market share growth. I can give you a few examples; Naples, Florida, certainly very competitive. We have 2 facilities in that market. And we're making market share gains largely because we have great leadership, great providers, and we've invested in the facility. Just opened up open heart surgery there, as we talk about service line and acuity expansion. So we have stories like that all across the portfolio where we have insights as to where we could go, perhaps another step further to advance the services we provide, build out the best relationships with doctors, take great care of patients and grow that market share. Obviously, market share is an inpatient measure. We're focused on that, but we're also focused on growing our share spend on the ambulatory side as well. So we have equal focus on measuring our progress in that regard.

Yes. I guess that was a good segue because you had -- one of my questions were going to be. When you -- I think you called out specifically either regional leadership or your hospital CEOs of leveraging some of your COVID experience in getting a lot of data to see where to add those service lines and tracking patients to make sure they get what they need. So is there anything else that you would attribute? How much did really the COVID affect this effort? Or was this -- how much of this was already underway pre-COVID?

Yes. I mean, not that we ever would want to say there was a benefit of COVID because we certainly know the human toll it has taken on patients' families, caregivers, what have you. But in our case, with those strategic investments in transfer centers and telehealth, they certainly served us well, served our patients in our communities well. But what I think it helped us was really repositioning ourselves within a region, demonstrating that we've invested in the capacity, the acuity, the services to take care of sicker patients. When there were smaller, again, lower acuity hospitals, they need to place the patient, and we had a means and a mechanism to bring them in. In some cases, that was altering referral patterns to other tertiary providers in those regions. So we really focused on building that relationship, taking great care of those patients, making sure they got back to their communities when the care was appropriate to do so. So I think building out those relationships, looking at our transfer center data on a daily basis. I think some might say on an hourly basis because it provides us such keen insights of what's happening real time. I do believe the focus on that data has made us stronger, operators better position in our markets.

Got you. Any particular -- you've mentioned transfer center several times in that strategy. I know it's been definitely an integral part of your long-term strategy. But any other specific success stories, recent successes that you would attribute to your transfer center strategy?

In terms of how we've developed it and deployed it, is that the question, Frank? I want to make sure I'm responsive.

Yes. Yes.

And so in that regard, when we launched the transfer center in 2017, it was September of 2017, starting in our Knoxville market, we kind of thought maybe half of the portfolio would benefit from an in-source or in-house controlled transfer center model. I think what's been impressive for us is going from our network markets to maybe some of our secondary markets, some of those smaller metropolitan or maybe 1 or 2 of the few nonurban markets that are left in the portfolio. We've been rolling out the transfer center to the point that now it's in over 75% of our hospitals being supported. And again, the reason I think that's happened is the insights. It's helped us open up our capabilities and add services and providers to markets where we perhaps thought we were probably capping out in terms of the level of care we could provide. But when you have this data and this insight, you see the number of patients that could be better served by us investing in advanced dialysis services, advanced cardiac services, neural services, bringing in telehealth components of that. It's really helped us round out our service capabilities to a broader part of that portfolio than we had anticipated. So again, we do talk about it a lot. It's been transformational, not just because of the technical patient logistics standpoint, but because of how it really has given us the most actionable data we've ever had.

Got you. And can you see -- you say you've got this now in 75% of your hospitals. Can you -- is there a discernible difference in those where you've had transfer centers in place for multiple years versus some that are more recently in terms of its effect on your economics?

Yes. Certainly, we're kind of bullish on the transfer center model, and that's why we keep expanding it because we like what we see. When we track our same-store growth, the number of accepted transfers from CHS and non-CHS hospitals, market share, again, I'm not going to say it's the same in every market because the competitive dynamics are obviously different in every market. But with where we've deployed the transfer center model, we've tweaked or adjusted some operational opportunities, whether that be adding more staff or adding more providers or services, as I talked about. We have seen same-store growth. With the exception of Q1 of 2020 because of COVID's impact, we have seen sequential same-store growth in our transfer center markets.

Got you. And maybe transferring, no pun intended, over to the kind of here and now across your portfolio. Maybe give us a little update in terms of anything you're seeing related to your utilization levels. Any color you might have that you could share with us since the call, whether it's what you're seeing with NICs or acuity or continuation of the in and outpatient growth. Any color there, any updates there would be appreciated.

Sure. I'll start, and Kevin, by all means, feel free to weigh in. I would say, since our earnings call, not much has changed, relatively the same levels of COVID. Again, our teams had, as I'm sure you've heard from everyone in our health care universe -- our teams had performed admirably. There is just no word to describe how fantastic our health care heroes are. But in terms of where we're at today, very stable case counts, we're pleased to see the vaccination rollout be as successful as it has been. I think it's created more calm and confidence in patients who deferred the elective care to come back into hospitals or even ambulatory access points for their care. So we're seeing just, again, similar trends to what we reported and shared with you in April. I think at the end of the day, in terms of getting patients back in for their elected care, we believe we can still hold on to good mix. We do believe we're going to see continued improvements in some of the -- I guess, I'll say, the elective higher acuity surgical service lines. We're starting to see that obviously take shape, I think, almost sequentially throughout the quarter. So not much change since our last update. But Kevin, anything else that you want to share on mix.

No, I think Tim summarized it really well. We came out of the quarter with improving trend. And I think we'll expect to see that kind of continue to improve throughout the remainder of the year. As we're only a couple of weeks or so past the end of the quarter, probably not long enough period of time to experience a big change yet, but certainly, as COVID cases have continued to kind of subside, we see that the trend towards improving those volumes back to kind of the pre-pandemic levels here in the not-too-distant future.

Got you. And I guess staying on that subject, when we think about the mix of the business, I would say, and maybe to Tim's earlier comment, it seems like for you more so than some of the other companies that there's a belief that this pent-up demand is more in the higher acuity area versus some of the lower acuity things. So is there any reason for that sort of thought process? It seems like for the other companies, it seems like the low acuity has been -- that there's expectation that there's more pent-up demand there. So any color, any thoughts, any suggestions on how that might be?

Yes. Again, it may be somewhat of semantics, but let me just say, when I'm talking about higher acuity on the surgical side -- I guess I look at surgery in 2 buckets. We have the lower acuity, GI, ENT, things along those lines that are -- I guess, I'll say, more basic procedure. But on higher acuity surgical services that are elective, like shoulders, total joints, and things along those lines. And we base our perspective, frankly, on the data. Certainly you've seen, I think, a stronger rebound in some of that lower acuity business once vaccinations have taken effect. Patients feel comfortable coming back in for screenings or diagnostics or therapeutic procedures. I would put the same even on the cardiac cath lab, seeing some improvements there. We had a little bit more of a lull on the inpatient and even the outpatient, and I'd say outpatient, ortho or spine. Typically, it's taking place in our hospital, but it may not meet an inpatient criteria under the new Medicare guidelines. But patients were deferring that based upon anecdotal information from our providers, again, vaccines, getting them on board, key first step for them. The other one was some visitation policies, getting family members in there to support their care, as they're recovering in the hospital. So that's kind of, I guess, the thesis points for us and where we see opportunities and then just tracking the data.

Got you. One thing that's been really fascinating is what's happened with ED volumes, emergency room volumes over the pandemic. Really has been difficult for really everyone there. So at one level, I understood that that's the biggest source that we're bad debt of where your uninsured volumes comes from. But so maybe that's the positive side. But any color on what you're seeing in ED volumes and -- or anything different about the types of volumes that you're getting now versus in the past? We've heard suggestions that maybe you've seen a real drop-off in low acuity volume. But what do you see there on the Ed side?

Sure, Frank. Let me start off on this one. So certainly, the volume that we lost during the pandemic, at least the majority of it, was lower acuity volume and the EDs. And a big percentage of that was uninsured and even Medicaid business. And I think as we all inherently knew, but recognized as a result of pandemic, the overutilization of emergency rooms for primary care. The other thing that's really contributed to that, though, is throughout the pandemic period, we've had little to no flu and respiratory business, which is often treated in the emergency room. So -- and that's typically very lower acuity type volume. So as we move forward, at least probably in the near term, we don't expect to see much of the flu and low acuity respiratory cases returning. And then as we kind of go beyond maybe the pandemic period and start to recover more towards normal volumes, I go back and point to some of -- what Tim had mentioned earlier with some of our capital investments. We've been investing in urgent cares and walk-in clinics. And we fully expect a lot of that volume to return in those settings, partially because people have gotten used to it during the pandemic period, when they avoided the hospital, but still been able to get care in some of these other settings, which were lower cost of care settings for us. And then with our investment in telehealth, that's being utilized to a much greater degree. So we believe we'll still actually capture a lot more of that business as it returns, but capturing it in a lower cost of care setting could be margin accretive to us.

Yes. And Frank, if I could just add on, I think Kevin covered it well. But obviously, we still see our provision of emergency care as important to our communities that we serve. It's still an area where we look at -- where we have opportunities to do a better job of taking care of our communities, building out perhaps some relationships with pre-hospital providers, leveraging the transfer centers. We still see growth on the higher acuity side, in our ED services as an opportunity. We're still investing in freestanding EDs. We opened up 1 in one of our Florida markets earlier this year. We had 2 more that will be opening up yet this year. And again, a pipeline, albeit maybe a little bit more of a discerning pipeline for our next freestanding ED additions to the portfolio. So we still see ED as being a critical component of the services we provide.

Got you. Another issue that a lot of -- there's been a lot of focus on, on the cost side is obviously labor. Managing labor costs through the pandemic. What have been your trends in terms of agency usage, really both unit of utilization, but also on the unit cost side? And do you see any changes there?

Sure. So we certainly saw, not unlike of many of our peers, some of our nurses electing to take travel positions and take advantage of some of the rates that the agencies were paying. And certainly, from our standpoint, we pay more in contract labor kind of during the pandemic. We're seeing that subside already and staffing rates return back more towards kind of a normal rate. We also -- I would point out that we did not experience some of the -- maybe as much of that contract labor, is those groups that practice more in the urban areas and along the coast, East Coast, West Coast. And we benefited in some of our states and in a few of our markets by the states using the CARES Act money that they received to create nursing pools, which we could get nurse staffing from without paying some of the premium pay. All that being said, there is still some inflated costs in our numbers over this past year, is a result of COVID from paying some premium pay. And again, as we kind of -- as COVID subsides and we get past that, we're seeing some relief from that. Frank, I think we may have lost you. I'm not sure if you can hear us.

Okay. I'm trying to think where we got kind of -- I think you were finishing up on labor. Maybe 1 last question because I know we're getting close to our time. You've been very busy over the last couple of years refinancing your balance sheet, including another recent financing in the last week or so. What's really left to do from here? And I'm just curious, as you refinance this debt, how are the covenants changing when you compare sort of the old financing to the new financing? Any improvement in terms of covenants as you compare against the past?

Sure. So let me start with the first part of that as what's left from here. With the refinancing that we did and between payoffs and pushing out debt, I think we covered about $8.5 billion over the last several months. We've significantly reduced our cash interest expense, and that's going to help us generate improved cash flows, as we go out for the remainder of this year and into the future. And so we can use that cash and really focus on growth. We don't have any other debt at this point that's callable or coming due and not coming due until 2025. Our next debt that becomes callable will be out in the first quarter of 2022. So we've got some time here to really focus on growth and improving our free cash flow. So that's really, I think, our first priority at this point. In terms of covenants, the new indentures look pretty similar to our previous indentures. And our most restricted covenants are still out in our 2028 unsecured bonds. So we've got a little bit of time before we deal with those yet.

Got you. Okay. I think we're at the end of our time. I'd love to ask more questions, and I apologize for the technical snafu, but I think we got it back together. So once again, thanks for being with us today, and that concludes our fireside chat. Thanks.

Great to talk to you, Frank. Thanks.

Take care.