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

Joining me is Kevin Hammons, President and CFO of Community Health Systems. Thank you, Kevin. It's always for joining us at the conference. We really appreciate it. I thought was -- I thought maybe the best place to start -- just a review of the kind of recent results and comment on some of the [indiscernible] initiatives that you've kind of got laid out for -- on the call and to the market right now, maybe just review those to kind of level set for the audience.

Sure. Thank you, Larry, and thank you for hosting us. We really appreciate being here. Thank you, everyone, for joining today. Coming down to the third quarter, we did experience some of that normal seasonality that we historically had always seen in the third quarter, particularly around surgeries that were a little bit softer in the third quarter, but it was more just normal patient behavior as people are taking vacations, I think getting back to kind of some normalcy in their lives. What we were able to do, largely though, as step over some of that, at least the earnings impact of some of that normal seasonality with very strong admissions and outpatient business around clinic visits and so forth. So as we continue to grow our business, continue to have made investments in the outpatient side and bringing on new specialists, we did have a very strong and actually sequential increase from the second quarter in both admissions and clinic visits. So I think that's giving us momentum -- excuse me -- some momentum into the fourth quarter and certainly a more positive outlook into the future, as we are seeing some of that growth and investments start to take hold. As we go into '24, continuing to focus on growing net revenue, we're making a number of investments across the organization, continuing to expand certain service lines -- some higher acuity service lines, making some investments in inpatient, adding beds in a number of our markets, continuing to focus on costs -- reducing costs as well. We've talked about a number of initiatives over the last several quarters. Actually, our margin improvement program -- which dates back to the fourth quarter '19 that we've continued to make progress on but more recently, adding our ERP investment, which we think will extend our expense reduction initiatives and give us some additional runway for that.

Great. Can you touch on -- I know you've talked about investments in service lines. I think you've added, say, 500 beds or so, I think, of the last 4 or 5 years in the outpatient strategy. Can you just maybe dig a little bit deeper on that and say, what you're exactly targeting on the investments in the inpatient side and the footprint in the outpatient side, which obviously has been a big topic in the last couple of years?

Yes, absolutely. And I get still pretty excited about because although we're investing in a number of hospitals over the last few years and continue to take some opportunities for some opportunistic divestitures, we have made these investments on the inpatient side and added over 500 beds over the last couple of years, which is the equivalent of a couple of hospitals, although we haven't acquired anyone from a scale perspective. We're adding beds. Our strategy is largely local. One of the things we've done is we've kind of migrated towards becoming more of an operating company versus a holding company. If you go back a number of years, historically, CHS was little more of a holding company. We've migrated over the last 5 or 6 years into more of an operating company, really developing kind of a playbook of strategies the hospitals can pick from or each market can pick from that we have a consistent means of executing on the strategies, but not every market needs to [ pick ] every strategy. So for those markets that we have capacity needs and are growing kind of that inpatient business, those are markets where we're adding some of the inpatient business. In other markets, we have sufficient capacity on the acute side, but we're targeting more of the outpatient service lines.

Okay. Great. Is -- from I think year-to-date, you're kind of between 2% and 3% on a same-store admits and your [indiscernible] 3Q? I mean is that a -- not a perspective on guidance, but is that a level that you think is a comfort level in terms of just where you think the base business is on a go-forward basis, from a volume perspective?

Yes. Yes. I think kind of that low single digits kind of 2% to 3% on a baseline perspective is the way to look at it.

Okay. Great. Couple of questions, which I'm sure you've -- labor -- evolution of your investment in labor and obviously, contract labor is down materially, certainly from a couple of years ago mid-50s in the...

Yes. It's [ $54 million ]...

Is that a fair level of baseline today, I think where you can run contract labor at that level and not to concern yourself with spikes? And then -- can you talk about that in terms of your investment in labor as part of that conversation, if you will?

I do. I think it kind of mid-50s is a good baseline. If we just continue on throughout next year or holding flat at that level, our contract labor would come down somewhere in the $50 million to $60 million year-over-year compared to [ '23 ] because we made progress throughout the year. I do think that there's opportunity as we get into the back half of '24, continue to bring contract labor down even further. I would say fourth quarter, we're looking at contract labor being relatively flat with third quarter. Historically, fourth quarter and first quarter is the higher for contract labor largely because of our footprint in some of our hospitals in Florida that we scale up for some of the seasonality, which kind of ends after Q1. So those have typically been a higher quarters for contract labor so as I think it remains flat here in Q4, Q1 and then some opportunity for continued improvement...

So just to frame that, mid-50s in Q4 and kind of opportunity potentially in '24 as it relates to contract?

Correct.

Okay. And I know there's been puts and takes in the industry, and you spoke about it on your call, but professional fees, physician fees have been a challenge for the industry growing charge. And then you've talked about in-sourcing and the opportunity it may create. You gave some metrics around and so on and so forth. Can you talk about where your mindset is on professional fees and physician fees as we look into '24? Is that a headwind? Is it a tailwind? How should bring these contracts on? Or is that a little TBD?

I still think it's a little bit of a TBD. I would say not ready yet to say that we can make material reductions to make it a tailwind. I think we're at a point where we're mitigating any additional increases in the professional fees. We're seeing some progress where we in-sourced the former APP physicians. They're now our physicians and that has been beneficial. We saw about a $4 million EBITDA benefit in Q3, and that was only really up and running for 2 months. I think we get a little more traction on that and then expanding into some of the anesthesiology areas of in-sourcing. And those benefits, I think, will help us mitigate any additional cost increase.

Did you take -- if you mind me asking the APP contract, did you take all those APP contracts? Or did you outsource some of those or is it a mix?

It was a mix.

It was a mix?

Yes.

Okay.

There were a couple of markets that we were already in process of moving to other third-party providers, but the majority of them we brought in-house.

Okay. We've hold a lot of different data points for some providers in that space. I mean what -- as far as bringing on those contracts, what are the biggest challenges that you face in the in-sourcing opportunity?

There's a challenge -- more of a timing challenge of getting physicians credentialed. And then it's really running a little bit different business than we've historically run. So -- but we were able with APP and that in the course of that, we brought on some of the administrative team as well from APP. So recruiting the physicians, scheduling, billing for those physicians is different than the acute care business.

Yes. And if I may ask the contracts that you brought in-house the APP and once you moved to another, I assume a third-party provider, what's the driving metric, as to what drives that decision, if you will, whether bring them in-house or leave them out to third-party?

It was largely availability of contracts with payers.

Okay. That was it. Okay. Great. Margins, I think for your -- little short of 12%, almost at 12% and your long-term guide is kind of mid-double digits. Give a sense of your thought process and timing to get there and some of the, I don't know -- call it hurdles, but some of the initiatives to get there in project and power and so forth. Can you tie that into the conversation as well?

Yes. So it's not going to happen overnight. We're looking at kind of a 3- to 5-year planning to get there. I think we're well underway, project and power, which helps give some additional runway to our margin improvement program, will be significant not only in helping us pick out some of the additional kind of software costs as we move to a single integrated platform. But just as we manage data differently, it gives us a significant more insight into some of our data with the expanded capabilities of the ERP as well as it will allow us to move all of our finance, supply chain, kind of administrative functions into a shared service environment, which is much more efficient than processing things locally in each market. So there's some savings opportunities there. As we continue to grow and leverage our fixed cost structure, that will certainly also increase our margins. And I think we're kind of at that point where additional growth will help -- will accrue to the bottom line at a higher rate.

Right. Okay. From -- bouncing around a little bit, but from a top line perspective, can you speak to managed care contracting? You guys -- I believe you said that more than half of your contract for '24 was booked already. Can you talk about the increases that you're seeing in this kind of inflationary environment? Are you gaining some leverage given kind of the cycle that we're coming out of with the payers?

Sure. So we're seeing kind of 4% to 6% managed care contracting, very similar to what we saw in '23, and that's about 100 basis points higher than we had historically been getting and kind of managed care contracting. So is if you think about maybe roughly 1/3 of those contracts roll over each year, we're still seeing some additional benefit. And I think we have another year or 2 left on saying that kind of benefit, particularly...

[indiscernible] Okay. Okay. Great. Audience, I didn't do this in the last [indiscernible], but if there's any questions, just raise your hand at any point in time. I don't want to dominate the space here. [indiscernible].

Maybe one question on acquisitions -- sorry, disposals because everybody is very focused on that. How do you feel about some of them closing, giving the FTC dynamic. It's becoming a bit more complex in general. So that's the first. And then in relation to over all the acquisitions and disposals, how has the landscape changed with hospitals doing better this year? Is there more opportunities to sell more other non-core assets maybe in some markets. I heard some rumors that some other assets are for sale. So curious about that.

Sure. Thank you. So we have really 2 deals in flight, which is [indiscernible] assets in Florida, and we expect that to close this quarter. And we're seeing -- they're just not seen being roadblock. So we're very confident that one is going to close this quarter. The other one in flight is our North Carolina asset that is being reviewed by the FTC. And we do not expect to hear from the FTC until Q1. And then we'll just kind of go from there based on the response we get. So I do think the FTC and the environment has changed a little bit, but we continue to have some inbound interest. I believe the overall landscape of potential deals is still very viable. And actually, I think there's probably a few more deals out there now than we've probably seen over the last maybe 18 months or so.

With regard to North Carolina, was that backup? Like that was right behind the other one that you could fall back -- as a fallback scenario if the FTC were to be complicated?

There's not, currently. I mean, we could potentially pursue another buyer or actually just continue to run the hospital if the FTC were to block that deal.

Kevin, just a follow-up there. Is the buyer in the market now typically -- maybe I'm answering my own question here, but typically not-for-profit player today, which is a little bit different than maybe what we've seen in the past?

It's a combination. We're seeing both for profit and non-profit buyers in the market.

Yes. Okay [indiscernible], you have a question?

Just going to ask on the integration of the APP physicians. We saw, obviously, HCA kind of with a big disappointment, as it was integrating some of the APP practices. And U.S. acute care undertook to pay some of the salaries since they haven't been paid since May. I'm just wondering -- your experience sounds different and much faster integration and more cost savings. I'm just wondering if you can give us some color and details on why you seem to achieve cost savings and integration at a faster rate than these providers?

Not sure I have enough information about what some of the others have done to make a good comparison, but I can speak to what we did. So we were moving very quickly when we talk about APP when they reached out to us to indicate they were going to cease operations, reached out to kind of the parties on their side that were necessary and struck a deal quite quickly within a couple of weeks. We brought their physicians on. We've met with all those -- their physicians upfront to kind of explain what was happening. We took over all the contracts kind of in place. So we stepped in the shoes of APP in terms of owning the contracts that they previously had, immediately got to work on getting those physicians credentialed so that we could build for them under our plan. That has taken some time, but the bills now are going out. So most of those physicians are now credentialed. I think one of the differences, at least as I understand it, as I previously mentioned, Larry, we brought on some of the administrative team that was previously working for APP and that's the team that did the scheduling for those physicians that did the billing and does the recruiting. So bringing that team over as well in place in some of the leadership team that was managing those physicians that we brought on, really allowed us to keep that business intact.

Just follow-on on that question as well. And we -- did you have to, as it relates to any of those contracts to pick up, any of the kind of legacy functional liability and/or just the wages, quite frankly, of those practices?

We did. Yes.

Was it relatively nominal?

It's relatively normal...

We heard just some contracts have been fairly material from some other players.

Yes.

Was that a onetime cash payment or what was that?

So -- yes, we picked up kind of the tail coverage and then ongoing coverage as well as some salary and arrears. Effectively, that was our acquisition cost of the business.

And just following up on that. Do you think the APP situation was unique in that you were able to have profitability because of the situation of being in a distressed state? Or does that help you decide to target other service lines that you may have outsourced previously and see it as a potential contribution to your firm going down the road? And I mentioned -- because you also mentioned higher acuity service lines, if you kind of extrapolate a little bit more on sort of what sort of higher acuity service lines you might be targeting as you go forward?

So I would say our experience with APP and then sourcing those physicians does suggest that we may pursue that further and we are not targeting to be a fully in-sourced model. That is not our objective here. But where it makes sense, I do think there are opportunities for us to continue to in-source some of those physicians. And in fact, we have taken that same model and rolled it out to some of our other hospitals, as they've seen the benefit and said hey, can we in-source our -- whether it's emergency room doctors, hospitalists and we're also looking at in-sourcing some of our anesthesiologists. In terms of higher acuity service lines, we're really talking about cardiology, orthopedics, neurology, some cancer treatment centers that we've opened up. So those are generally the higher acuity services that we're looking at.

Could you comment on the Medicaid supplemental payment programs submitted by the State of Mississippi to CMS? Any color on the timing? Have you been in touch with the state government officials? And have you assessed what any potential impact to your earnings as a result? And then following on, could you maybe comment on your view of your operations in Mississippi, Merit Health. And have you been investing in that system? Or would you consider disposing of it in the future?

Sorry, I don't get too far ahead of what the state has done. We've have been in contact, very close contact with the state. They have submitted the plan to CMS, and the state has put out some numbers around what they believe the incremental benefit is by hospital, for every hospital in the state. At this point, again, we're not to get too far out in front of that. Our experience has been, CMS can make changes to what's been submitted. They may also change the timing of when it's effective. So until we get that information out of CMS, we haven't really commented in terms of quantifying how much it will be to us. What has been submitted would be effective -- the request is for it to be effective July 1 of '23. So there'd be a retroactive piece, but we don't know that CMS will approve that. I think there was one other to your question?

Operations in Mississippi, Merit Health. Is it core you're investing? Or would that be potentially divested in the future?

We have a pretty good presence in Merit. We have made some investments. It -- I would not say it's been a core market, but it is one we think there's certainly some potential for getting this program through will be very meaningful to the operations in Mississippi.

Can you walk us through your -- the change in cash flow guidance for 4Q and for 2023? And you talked about some onetime nature to the tax recoveries and so on. Can you provide those components and kind of timing about the differential around the shift in 3Q?

Sure. There were a couple of things. So 1 component was really accounts receivable but as a result of system conversions in -- earlier in the quarter, it caused some billing delays and those bills roll out, and we expect that to -- those to be collected. And the majority of that cash should be coming in, in the fourth quarter. And I believe that was around $60 million. Then the tax component, we did anticipate having a tax refund this year in the $100 million range. We still anticipate getting that refund, although it's not coming this year. So I would expect that in the first half of next year. And then the last item that I recall here is the 163(j) interest deduction. We anticipated that to be rolled back and it has not yet been rolled back, but we understand there's bipartisan support in Washington to actually do that and make that happen. That will also add to -- or the fact that it wasn't rolled back, is resulted in us becoming a cash tax payer in '23. But when that gets rolled back, assuming it does, then we'd actually be to get that back as well.

Okay. And can -- any idea of kind of sizing that?

Yes, that was about roughly $75 million.

It's about $75 million?

Yes. Yes. And maybe one other item in regards to our conversation about APP, in-sourcing those physicians getting credentialed, we did have a little bit of a delay in getting the bills out. That was roughly $20 million.

Just by way, I don't know if there's any questions in the audience in regards to [indiscernible].

Yes. With regard to your outpatient strategy, that sounds very exciting. I was wondering whether you were able to sort of have more details on that? Like how many ASCs you have now versus you had 2 years ago? How many urgent care centers now versus 2 years ago or freestanding ERs or freestanding radiation centers, just for us to see quantitatively a bit more what really changed?

So we're -- so we have about 50 ASCs today roughly, [ 20 ] freestanding emergency rooms and, I believe, 60 urgent care centers. We're adding Kind of -- in terms of freestanding EDs 2 to 5 [indiscernible] ASCs. And then 5 to 8 range each year that we've been adding. We have inventory surgery centers in 85% of our markets already. So we have a good presence in all of our full markets with ASCs. The markets where we don't have one are the most [indiscernible] markets where it probably doesn't make sense and there's a need to have an ASC in those markets. So we believe we're adequately covered, but continue to look for opportunities in our existing markets where there may be an option to add another department with some existing physicians, if maybe there's a practice out there that is a leading practice in the community that's not affiliated with us, if there's an opportunity to affiliate with them and pick up in ASC, we'll look to do that.

Just an extension of the cash flow question, if I will. And I think I know the answer, but if you monetize [indiscernible] I think your fourth quarter kind of a pretty good cash flow metric here, deploy 100% of that to debt reduction?

Yes, correct.

That's where you're going to go with it? Okay.

Yes. That would be correct.

I want to confirm that. Okay. I don't know if there is any more audience questions. If not, I'll ask you the dreaded question of GLP-1, which I maybe -- just I guess 2 questions I have one. Maybe we don't have time to get to that -- you kind of mid-70s assets to the hospital markets. If I want to ask you 3 to 5 years down the road and ask you what your ultimate footprint would look like? Is there any way you could size that today? In terms of when you look at core markets and core assets and where you want to be? So is that a fair question?

We don't have a target size. I think we'll continue to look opportunistically. I think in the near term, there could be some additional divestitures. But similarly, we're looking at some acquisition opportunities. We have done that over the past, I would say, 1 year to 18 months. Nothing has come up yet that we move forward with. I think it's a little early for us giving just where our financial position is but if we wait until the balance sheet is, right for doing acquisitions, we're probably a little bit late to the game. So we're out there looking already so that as soon as we're kind of in the right financial position and we could make a move to do an acquisition, we would certainly like to be back in the mode of acquiring hospitals as well.

Would there be existing markets or into new markets?

I think -- additionally, we're starting to look at existing markets where we can expand within the existing market. And I think it's important for us, as we try to leverage our fixed cost structure, going into a new market would add more fixed cost versus expanding into an existing market. But eventually, I could see us getting into new markets as well.

Okay. I keep saying last question. One last one. Could that assets -- outside your kind of -- could be in the behavioral, could it be in that footprint within an existing market?

It could be, yes. We've expanded into kind of both behavioral and other post-acute services generally through partnerships because it's now our core business. So we've done some work with Acadia and with Select Medical and others to joint venture in some of those markets.

Okay. Great. Thank you, everyone. Thank you, Kevin...

Thanks.

Thank you for time -- for taking the time and joining us.