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

Welcome again. We're very happy to have Community Health. Kevin Hammons, CFO; and Ross Comeaux, Treasurer. And we're going to do just a few slides and then go to sort of fireside format, but of course, leave time for your questions.

Sure. Thank you very much, David. Thanks, everyone, for joining us today. It's good to be back in person. And I appreciate, David, hosting us here today in Miami. If I could just start with maybe a couple of opening remarks. 2021 was a very strong year for us and we had a strong finish to the fourth quarter. We certainly were able to execute on a number of our growth initiatives this past year, able to grow EBITDA and EBITDA margin, deliver positive free cash flow for the year, and we're able to lower our leverage. And as we look to 2022, we expect more of the same. So I'll walk through just a little bit of recent history with CHS today in the company outlook for '22 and then ask Ross Comeaux, our Vice President of Investor Relations, to walk through some of the financial slides. If you take a look at just CHS at a glance here. CHS is in 48 markets spread across 16 states with a little over $12 billion of revenue in 2021. We're certainly -- we're one of the largest publicly traded health care providers in the United States. The majority of our hospitals are located in regional networks, which provides us a great opportunity to leverage our scale and leverage our fixed costs. And strategically, we're focused on growing -- faster growing markets in states. In those 48 markets, we have a number of location sites across the continuum of care. We have 83 hospitals, 42 ambulatory surgery centers, 17 freestanding emergency departments, over 60 urgent care walking clinics and over 600 physician practice locations. So in total, over 1,000 sites of care. This provides us great scale and breadth of services in these markets and positions us well for both organic growth as well as capturing future market share. And throughout our transformation, we've made some strategic investments in both operational improvements across all these markets. And we expect to be able to leverage these growth strategies and our scale going forward to continue better our competitive position and in -- or achieve both organic growth as well as capture market share. Looking at the map, you can see we're largely located across Sun Belt states. In these states, again, we are extremely confident in the markets we're in. I believe we have good demographic growth as well as economic growth in these markets. Approximately 52% of our net revenue is in outpatient services, so pretty evenly split between the inpatient acute services and outpatient services. And 4 of our top 5 markets across the Sun Belt states have not yet expanded Medicaid services. So we believe that, that is another opportunity for us as we move forward. If I could talk just a minute about COVID and how we've navigated through COVID. Safety has certainly been our first priority, safety for our patients, our staff, our providers. We've had a lot of investments in telehealth services starting pre-pandemic that has allowed us to navigate through the pandemic itself. Our transfer center, which we got started, again, pre-pandemic that has certainly helped us bring in both COVID and non-COVID patients across our networks. And then the supply chain, which was an initiative that we kicked off largely in 2019, pre-pandemic, but served us well throughout the pandemic to ensure that we were prepared for some of the surges in ways and the supply chain issues that have presented themselves. Going forward, again, all of these investments as well as the additional investments we've made in a number of growth opportunities, we believe will serve us well and continue to deliver margin improvement. As you look at net revenue growth kind of during the pandemic, you can see with some exception of some of the periods that were shut down, that we've been able to deliver positive net revenue growth. And likewise, on the margin improvement throughout the pandemic, we were able to continue to improve our margins. Some of this certainly, the quarters that benefited from some pandemic relief funds, but even excluding pandemic relief funds, which were largely in the second and fourth quarter of 2020 and the first and fourth quarter of 2021. But even excluding those, we've been able to improve our EBITDA margins compared to the prepandemic levels. With that, let me turn it over to Ross to walk through some of the performance.

Thank you, Kevin, and good afternoon, everyone. It's good to see everyone today. Today, I'm going to walk through a number of financial topics, including recent accomplishments, our debt maturity profile, some EBITDA margin expansion and how we're thinking about the future. So on Slide 9, recent accomplishments. Through these recent accomplishments, we really improved the portfolio. We think we're well positioned to drive continued net revenue growth, EBITDA growth, free cash flow generation and continue to lower our leverage. As Kevin mentioned, I think we have a stronger portfolio today as we were divesting a number of assets over the past couple of years. We were also making a number of investments back into the portfolio both across the corporate office and in markets throughout the portfolio. So looking at some of the investments we've been making, a lot of these have been focused on net revenue growth initiatives going forward. Kevin touched on the transfer center earlier, but that's rolled out now in about 75% of our hospitals. It's driving good data and good markets sights -- market insights into our markets, allowing us to make quicker decisions. And then it's also driving patient volumes, both from non-CHS sites of care and then also CHS sites of care. Another one is the accountable care organizations, that's now into the fifth year. It's continuing to drive some shared savings for the company. That includes 14 ACOs across our portfolio, also covers 200 Medicare fee-for-service lives. And importantly, it's allowing us to align with both independent and employed physicians. Primary care development also remains a key focus for the company. Our centralized physician recruitment team at the corporate office continues to do a good job attracting talent within our portfolio. Our physician hiring is up about 14% versus 2019, which is the pre-pandemic baseline. And then looking at the fourth quarter of 2021, we recently had 13% volume growth versus the prior year, which bodes well for additional volume growth forward. Looking at CapEx, as we mentioned, we're continuing to invest in CapEx, both on the inpatient side and the outpatient side across our existing markets. We've been investing in high acuity service lines, new beds, new surgical suites across markets such as Birmingham, Alabama; Huntsville, Alabama, Knoxville, Tennessee, Austin, Texas and other strong growth markets for the company. We recently opened 3 new hospitals over the past 18 months. One of those was in Tucson, Arizona, one was in La Porte, Indiana, and both of those opened in the fourth quarter of 2020. So those are continuing to ramp. We recently opened a hospital in Fort Wayne, Indiana, which is in our strong Fort Wayne market, that opened in the fourth quarter of 2021 and we're about to open up our fourth hospital in Tucson, Arizona, which is our fourth hospital in Tucson. On the outpatient side, we're continuing to invest in access points. We opened 3 new ambulatory surgery centers in 2021 and also 3 FSEDs as well. And then we also announced 3 recent JVs. So we're continuing to make investments on the post-acute side as well. And adding all this together, we think we're well positioned to continue to drive top line growth going forward. On number two, we continue to make operational improvements. A big part of that is our margin improvement program, which we've talked about. We kicked that off in the middle of 2019. That's a formalized structured plan that we continue to meet on, on a regular basis. It's remained on track throughout the pandemic. We've continued to drive significant savings in 2020 and 2021, and we see good runway for savings in 2022 and beyond. Now moving to bullet #3. Over the past 24 months, we've made significant improvements across the capital structure and the balance sheet. We've reduced total leverage by 2 turns. We've reduced total debt by about $1.3 billion, and we've reduced annual cash interest expense by $230 million. Moving now to our debt maturity profile. This has also been significantly improved over the past 2 years. I just mentioned the $1.3 billion of debt pay down. But in addition to that, as we were exiting 2020, you could see some pretty sizable maturities in '23 and '24. Over the past 2 years, we've extended about $8 billion of debt so we have great runway to execute our growth strategies going forward. We also have good liquidity with over $500 million of cash on the balance sheet. And we also recently extended our ABL. We have a $1 billion ABL facility that was extended from 2023 to 2026, and that remains undrawn. Moving now to Slide 11 on our adjusted EBITDA margins. As you could see, adjusted EBITDA margins have moved up into the right. As I mentioned -- or as Kevin mentioned, we have benefited from some pandemic relief funds. We've also benefited from the divestiture program as well as some of the growth initiatives I just walked through. Some of those net revenue growth initiatives are obviously driving some improvements and then also the margin improvement program, which I just walked through. And then finally, on Slide 12, as you'll remember, I think we introduced our medium-term targets last year at an equity conference that was about 13 months ago. That was a 2- to 4-year plan, which included adjusted EBITDA margin of 15% plus or higher, annual free cash flow generation being positive and then reducing our leverage below 6x. Obviously, we've made some significant progress across the medium-term targets over the past 4 quarters. And then just 2 weeks ago, we provided an update on those medium-term targets. We essentially pulled forward last year's goals, which are now on the left. And then we introduced new medium-term targets, which we expect to achieve over the next 3 to 4 years, which calls for adjusted EBITDA margin of 16% or higher, annual free cash flow generation positive and growing into the future and then reducing net leverage below 5x. And then beyond these plans, we're obviously continue focused on -- continue to drive good net revenue growth and continuing to lower our leverage into the future. David, with that, I'll pass it over to you.

Thank you for the overview.

Thank you for the overview. I thought I'd start with what seems to be the favorite topic right now or point of concern in the creditor community probably equity too, is labor. And I wondered if you could distinguish between labor cost increases for agency labor and the percentage of your workforce that has called out on account of, I guess, a positive test or something Sure.

So -- and some of this, we may have talked about a little bit in our earnings release, but our contract labor, which we show in other operating expenses, so not in the salaries and wage benefits. On a net basis, for the fourth quarter of 2021, the impact on EBITDA was about 200 basis points of net revenue. And our contract labor rates, if you will, are about 3x what an employee cost us. So our workforce has remained relatively stable in terms of size FTE counts year-over-year. So for every $3 of incremental contract labor, we're losing $1 of salaries, picking up dollars.

So that's a transfer from salaries, wages and benefits that might have been $0.75 to $1, ends up $2 and...

Yes, it ends up $3 of contract labor. Yes, absolutely right. And so again, net impact on EBITDA about 200 basis points for the quarter, about 100 basis point impact for the full year.

So some -- I think some health care service firms have attributed this in decent measure to just a lot of people calling in sick around December or January. Wondering if it's too optimistic to think that that's abating and is that something that you can monitor sort of live.

Sure. We certainly monitor that live. In the early surges of COVID, where we started to see a ramp up in contract labor, was largely due to capacity restraints with the numbers of COVID-positive admissions. I think what we saw late in the fourth quarter and with omicron was more of a -- less about the capacity issues with inpatient COVID patients, but more about COVID impacting our workforce. And so you had employees testing positive as well. And that was a little bit of a different dynamic with this most recent surge. We saw the peak of both COVID inpatient admissions with omicron and the peak impact on our workforce testing positive in January.

In January.

So we are seeing that come down on both COVID admissions as well as the COVID impact on our employees.

But that was all known to you when you put your guidance out there.

That was known when we put our guidances and was factored into our guidance for the full year. We do expect that to moderate. And as we talked about cadence of EBITDA for the year, I certainly expect this situation to have the biggest impact on the first quarter of the year and then moderation and improvement from that going forward.

I wanted to ask you how important -- how significant is the 20% add-on for Medicare, COVID-related patients either to you financially or just as an impact on the labor market to the extent that it gets talked about.

Sure. The way we look at COVID, the payments related to COVID, the add-on payments. Certainly, those attributed to Medicare patients. Those patients also have typically the longest length of stay and the highest costs associated with caring form. We do not see COVID patients, COVID admissions as being accretive. In fact, they're dilutive to margin. So although looking out forward, as COVID begins to abate, and we get to a more normalized, although I believe we'll have COVID going forward but at much lower levels. With -- as we lose those payment streams, we'll also be reducing our costs associated with caring for those patients.

Makes sense. Okay. So I thought I could pivot to learning, perhaps a little bit more about you expressed confidence in your markets. The hospital sector generally is facing the headwind of technology and patient and physician preferences to do things outside the 4 walls of the hospital. So there's a sort of a macro volume figure that may play in the United States overall, but then different markets have different demographics, whether it be in migration or job growth, whatever. So if you could call out maybe 1 or 2 markets and say why you think you're going to beat the national trend line and why that would be helpful.

Sure. As I think about our footprint across kind of the Sun Belt states, states like Arizona, Texas, Florida, in particular, are all benefiting not only from a demographic shift that we've seen now over the past couple of years, but I think it's projected to be -- to continue probably over the -- even the next decade. But with that coming economic gains as well as more employers are moving to low tax jurisdictions and even as remote work allows employees to relocate. So in those -- as we kind of build our portfolio with a number of networks in those states, we see tremendous opportunity for us not only to capture our share of that growth, but as we continue to grow market share in those markets, there's a larger base of commercial business to also pick up. So we think that will be very beneficial in helping us expanding our margin profile going forward.

I know market shares are pretty hard to get a handle on. But do you try to do that? Or is that not really productive for you?

It is hard to get your hands around. But we do look at it with available data in each market. That data is not always comparable market to market, but we do have a baseline in each market, which we're able to measure year-over-year. The other thing I'd just maybe mention along the lines of your question, is we're taking a pretty balanced approach to both inpatient and outpatient growth, which depends largely on -- again, the dynamics of each market where we believe and how we approach kind of strategically as each market develops our own strategic plan. But as we move more from a holding company to an operating company, we've developed a playbook of strategies that we are going to deliver in a more consistent manner supported by corporate resources, supported by technology that each market can pick from. So as they roll it out, they're going to roll it out in a consistent manner with other markets that are doing that. It's much more efficient, much quicker rollout than each market developing their own strategy. So as we do that, it's leveraging, again, some fixed cost in creating those strategies. But each market, and I would use Naples as an example, where we're adding 80 inpatient beds in that market because we're taking market share growing the acute care services. Other markets are focused more on outpatient where the opportunities are presenting themselves to do that. Oftentimes, the longest pole in the tent is recruiting physicians and to support those service lines. So we're not able to just pick a service line, build it, and they will come. You want to pick service lines where you know you can grow and you have the resources to do it. So we're very nimble and kind of agile in that process in picking those strategies kind of market by market.

Ambulatory surgery centers. I guess you've got -- I draw it down roughly half the number of ASCs relative to your hospitals. Is there some -- have you identified what the full opportunity set might be within your markets? Is it considerably more than that?

We are continuing to grow in that space. There are other opportunities, be it through joint venture, through de novo development. We're looking at, again, kind of market by market in each of those opportunities. But we expect -- I think we added 3 this past year and probably we'll add a similar number, if not...

Annually?

Yes, annually going forward.

Okay. One headwind that I jotted down, I'd love to hear your perspective on is this initiative within the Indiana state legislature. There's been some reports perhaps help fed by Blue Cross, Blue Shield of that state that hospital prices are too high. But regardless of the Republicans that have a super majority in the Indiana legislature now have decided that they want a multiyear plan to bring hospital prices down. It's an important market for you. So I'm interested in what you think -- how that might shape up in the financial implications.

Sure. I guess a couple of things I'd comment on that is the pricing -- one, we're not the most expensive. And there's a couple non-for-profits in those markets that do have higher published rates than we do. But published rates and pricing is still a lot different from what a patient or even the managed care companies actually pay because it's based on your negotiated rates, which are not the pricing -- is not the pricing that they're looking at. So at the end of the day, although I think this gets some news coverage, I don't see it having a tremendous amount of financial impact to us. And I don't think we're going to be the first ones targeted in those markets.

Okay. Well watch that space. I don't know how they're going to write the legislation -- the sentence literally about bringing prices down. But it's going to be an interesting test case. I wanted to ask you about capitation just because in the -- and this will probably be my last question. It's been a popular investor focus for the last year or 2, particularly in Medicare Advantage. But if you're at our Morgan Health session, even in the commercial sector, we're going to try capitating for our own employees. This may be just a glacial trend that it's going to be forever to see any impact. But do you see any impact in any markets?

We do not. We're not seeing any impact.

Because when you look at the stats in California, which is -- it's pretty deeply rooted, the utilization is double digits lower than the rest of the country for similar cohorts, right, and Florida as well. All right. So open it up to the audience.

Okay. So I was just curious if this is on your mind at all, but like with surprise billing. You have some outsourced provider groups, emergency medicine, anesthesia, radiology, et cetera. Do you ever consider whether you might have additional subsidies that you may have to pay in the future if the no surprises act changes the rate structure?

Sure. Certainly, on our radar, something we keep a close eye on. But as we've evaluated it, we did not have a big exposure to the national providers in that space. Most of our contracts are with local groups or smaller regional players. So we have the ability to either renegotiate in certain cases to in-source if we need to. And we don't believe we have a big exposure to increase subsidies.

As you look at your portfolio, are you guys happy what we have now? Or is there still some markets that you may be able to divest or -- I know there's more exposure -- that create more exposure what anything about the [indiscernible]

We're very happy with our portfolio as it stands. We're officially completed with our divestiture -- our formal divestiture program. Now that being said, we continue to get inbound interest. We'll continue to evaluate markets on a go-forward basis. As we get past COVID and in a more normalized environment, COVID probably will have impacted the business dynamics in certain markets. And we'll continue to evaluate that to see if it still fits our strategy going forward over the next 3 to 5 years. As of right now, nothing is on our radar. And I would say we're happy with our current portfolio, and I believe it's one we can continue to grow.

Kevin, you mentioned on your call that you, I think, implemented fairly recently or maybe just start to see the benefits of some patients' ability to schedule stuff online with an app. Is that something that was homegrown. Did you go buy it? Can you tell us any anecdotes about success and what it means for your volumes, I suppose?

Sure. So it is a third-party product that we've put in, and I believe we're close to having it fully rolled out across our portfolio of hospitals now. It's been something we've been working on over the last couple of years. We're seeing just a tremendous amount of increased volume of patients who -- once they become aware of it, they want to interact with us that way. Not only are we doing that with kind of online scheduling, but our patient access center, which is a call-in number, we're also -- we're at centralized -- kind of centralized scheduling service, if you will, that's been very beneficial. And it's helping us improve our network integrity of keeping patients within our network of physicians.

Interesting. Have you tried the -- is it like open table or something like that?

It is. In fact, we have most recently rolled out. So when you go to look up a physician on Google, where it used to have to go then to the website to then schedule that physician. Now you can actually schedule through the Google window or from the Google page, go straight and provides availability of physicians. So again, just making it easier, making it what people are used to, like I said, with open table or some of the other apps that people are getting used to, we want to -- want that same ease of use to come into our network of providers.

Audience questions?

I was just wondering if you could just give a little bit of color or let us know if you're thinking at all about the Medicaid redetermination process that will start when the public health emergency ends. And if there is a decline in Medicaid enrollment, which I think people expect there will be is some folks get lost in the shuffle, how that might impact you, especially with the regions where you're mostly looking into.

Yes. So again, when the public health emergency period stops, which right now, I think we're -- in general consensus is, it's going to be extended at least 1 or 2 more times, at least to probably the fall of this year. But as that ends, we should also be seeing a reduction in the number of COVID patients, the reduction in our cost structure. And 4 -- as I mentioned earlier, 4 of our top 5 states have not yet expanded Medicaid. So again, our efforts, our lobbying efforts and so forth and working with the states, we believe there's sufficient opportunity. The democratic administrations have generally been favorable to the providers in that sense and in those types of reimbursement programs, we get a sense that they would like to expand that. And we're seeing some level of reduction in the resistance among those states that have not yet expanded to begin thinking about expanding Medicaid. So I think reimbursement, there's an opportunity for us.

In terms of super type expansion is still for whatever reason, political reasons. Is there an impact to you from -- or have you seen a benefit, I should say, from the growth in Medicaid enrollment as people have not been redetermined? And therefore, whether it is potentially downside as they're sort of cycled off of Medicaid once that process restarts.

There's probably -- I don't know that I have a quantification of that benefit. I think generally, we're seeing some benefit. But throughout the pandemic, and the pandemic's created a lot of noise around that because, generally, you're seeing a little less of the Medicaid business during the pandemic than we had previously. We're losing -- and where we've seen some gains on acuity and net revenue per adjusted admission have been from the reduction of some of that low acuity business particularly in emergency rooms and hospital-based emergency rooms that has been oftentimes from those Medicare -- Medicaid patients. And that low level of acuity typically isn't a strong margin driver anyway. So to the extent that, that becomes kind of a more permanent ongoing trend. And we think that it probably structurally is as we will continue to probably capture that business but capture it in lower cost of care settings like freestanding EDs, walk-in clinics through telehealth. And as long as we're able to provide that service in a lower cost of care setting, we believe it's margin accretive to us going forward.

All right. Well, people are just coming off their lunch, maybe a little like dope. I think we're going to let you go with 2 bonus minutes. All right. People can approach you on your way. Well, I'm sure.

Thank you, David. Thank you very much.

Appreciate it. Thanks, everyone.