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

We're hosting Kevin Hammons, President and Chief Financial Officer. And in the room here, we also have Anton Hie, Vice President, Investor Relations. So thank you guys very much for being here today.

Ben, thank you for hosting us. Really appreciate it.

Absolutely. And let's maybe talk with the -- where we can start with the obligatory policy discussion. Obviously, lots of movement this past week with the House's Bill. And maybe you can kind of talk about what you're seeing that's changed. It sounds like there's a lot of motion on work requirements, but just wanted to get your overall view and how it's impacting your thoughts on DPP programs and the like.

Yes. Overall, I think the bill came out at least where it stands right now. There's still some -- a lot more work to do before it gets through the House and over to the Senate. But coming out more in line with where we expected it to be, which was not near as bad as maybe some had predicted. I think the -- it appears that there's going to be the DPP programs, at least the ones that are currently in place, as well as there's probably going to be a deadline set in the future for some new ones to come in that those will continue to operate as they are today. So we don't see any real pullback in those. And then maybe going forward, some limitation on growth, but we don't see any of them being pulled back. And then with the work requirements, as you mentioned, it appears that may be something that goes through. But I think net-net, our view is that would probably be at worst neutral to us, potentially even slightly positive.

Got you. Would that just be because of the labor component to it with coming back and helping you staff on the hospital...

Yes, yes, absolutely. And the potential for some folks to actually end up with employee coverage on the insurance.

Got you. And then when we think about the DPP programs and the kind of the realm of possibilities through renewals, what do you expect the rate updates on those renewals to look like? It seems like that's an open question. And do you think you'll get commensurate inflation-adjusted rates as those get renewed year-to-year?

I still think to your point, I think it is an open question, and we don't have clear line of sight into that yet. But I do think, generally speaking, we'll probably see inflationary build on that and keeping in line.

Got you. Anything else in the bill that's kind of keeping you up at night or.

Not all at this point. Still waiting to see where it ultimately ends up as it still moves around a little bit. Our view is still by the time it gets through the Senate, it gets no worse than it is today. I think that's very favorable for the providers, and there's a potential that it moderates even a little bit more before a bill actually goes to the President's desk for signature.

Great. And maybe we can move on to operations a little bit, just kind of recap a little bit of the volume trends that you're seeing. I mean, obviously, 1Q was interrupted or disrupted a little bit by the flu. So we saw a little bit of noise in there. But may be kind of what have you seen since?

So a couple of things happened in Q1. Certainly, the flu was a little bit of a disruptor. But even after the flu season ended, which was kind of middle part of February, we continue to see some headwinds, and it was really driven by a decline in elective surgeries from commercially insured patients. And our read-through on that is that it's more of an economic decision by your patients because it was that group of patients with high co-pays and deductibles electing not to have care versus the government-insured patients who continue to come in and have elective procedures. So overall, our inpatient volume was very strong. not much of a decision. People needed care were coming into the hospital. And -- but your -- our surgeries are down. Our adjusted admissions were right in line with expectations, but surgeries were negative. And I think not only for us, but pretty much across the industry. And that negative was driven by the commercially insured and decline in elective procedures. So as we think about what consumer sentiment means, and I don't think consumer sentiment has really kind of improved much since the first quarter. I do think that, that continues to be a little bit of a headwind. But as we think about the full year, I think what that really does, you may see a little more pullback in the first half with people with commercial insurance. But as they meet their co-pays and deductibles through the year, they'll rush to come back, get all the procedures in before it resets again next year. So I do think that it has the effect of maybe a little more pullback than normal early in the year, a little heavier business in the end of the year.

And is there anything to call out that's different with this year's commercial and co-pay reset, maybe given that we're getting past redetermination and maybe that's -- could that be heightening that dynamic this year?

I don't think redetermination, we haven't seen much of an impact as a result of redetermination last year. I really do believe that it's more of a consumer sentiment that's driving some of the behavior.

And then just on the rate side, kind of anything in terms of acuity mix on your inpatient surgeries or other dynamics to call out that's kind of impacting you there?

Sure. Acuity, medical acuity is actually up or was in Q1. Surgical acuity was also up in Q1. But with the decline in surgeries and the increase in inpatient medical procedures, that proportional between the two ended up diluting our overall acuity mix because your medical acuity is typically lower whereas historically, we've run about 1/3 surgeries and 2/3 medical cases. In Q1, it was more like 1/4 surgeries and 3/4 medical. So there was an overall dilution to acuity, but individually, each of them improved.

Got you. And then if we could maybe move over to labor performance. It still looks like you're having really strong cost controls on the labor side. Wage rates appear to be progressing in line with your expectations. Maybe give us kind of an overview there.

Sure, can. So average hourly wages increased about 3.5% in Q1. We guided to 3.5% to 4%. And then we were able to offset that really through productivity gains in a number of different areas. So our overall salaries and wages as a percentage of net revenue did not increase in the quarter. And I think we managed through that very well. So again, in line with expectations, I think with the average hourly rate being at the low end of our guide range to start off the year, that puts us in a pretty good spot as we see some additional increases come throughout the year, we'll be able to maintain that well within our guidance.

Got you. And then some of these efficiency gains on the labor side, are these resulting from any specific initiatives, Project Empower or any of those types?

They absolutely are. So there's a couple of initiatives that we've put in relative to our new ERP. One, we've moved all of our back office functions into a shared service environment, which is much more efficient in pulling those positions out of the hospitals, doing those all centrally. And we've been able to gain some leverage on the labor force to do that. We've also put in as part of the ERP, a new scheduling system that comes -- it functions integrated with the HR component of the ERP. It allows the nurses to do scheduling on their mobile devices, clocking in, clocking out, planning their schedules, allows nurses to do -- schedule partial shifts, which has been both a big kind of satisfier to the nurse staff, makes it easier on them and gives us better insight because you don't have hospitals doing scheduling or departments doing scheduling on paper where no one else can see it. Now we have much better insight. We can begin to align the schedules with patient schedules and surgical schedules to become more efficient in how we're staffing.

Is this kind of flowing through to benefits and retention at all and...

Absolutely. Our retention rates have continued to improve where probably with the nurses RN retention in the high teens right now, but that's significantly improved over where it was a couple of years ago. And I would say we're probably slightly below -- or slightly better than industry average in terms of retention so -- turnover rates in high teens, not retention, I think the turnover rates in the high teens.

Got you. And then is there any indication that you're seeing yet this consumer sentiment or fears over future economic headwinds bolstering the nursing labor pool at all yet? Or is that.

I haven't seen it really impact the nurse labor pool. And we've had a shortage of nurses for 25-plus years. But continuing to see improvement, the work we've done with Jersey College, and I think our recruiting efforts, we've also moved all of our recruiting into a centralized function as opposed to doing recruiting locally at each hospital. So it's allowing us to cast a wider net and take advantage of our footprint being across many of the Sunbelt states where people are moving to Arizona, Texas, Florida, Tennessee had been pretty favorable over the past few years, people moving from the East Coast and West Coast, leaving some of the higher tax jurisdictions for lower tax jurisdictions and recruiting kind of with that in mind, I think we've benefited from that and taking advantage to be able to recruit nurses from other areas of the country.

And then moving to other operating expenses, your professional fees. I just wanted to kind of get the thoughts there. Some of your peers have talked about a little bit of an acceleration in the first quarter. I just wanted to see what you're seeing there.

Continues to be a pain point for us. Over half of our medical specialist fees are anesthesia, but we're also seeing an uptick in radiology fees. We guided to an increase between 8% and 12% for the year. First quarter, our professional fees were up 9%. So in line with kind of our expectations, but we expect it to continue to be a pain point. Think there's a shortage of physicians out there in those specialties. Now we did, in the fourth quarter, in-source a large market with anesthesiology. That's gone very well for us. It took us a quarter to kind of really get up and running, but that's gone very well for us. Looking at some other markets that we can in-source and hire, employ some of those anesthesiologists. And then on the radiology side, we're really looking at some technology solutions, which there's more opportunity for technology solutions in the radiology space, either using remote readings using AI, and we're looking at some opportunities to use some of that to help mitigate some of the cost increases.

And then on the anesthesiology side, is the decision to in-source more kind of locally driven market by market? Or is that just a broader initiative that you're pursuing piecemeal? Or how do we think about that?

It is somewhat of a broader initiative in the sense that we have hired some expertise in that area to be able to run anesthesiology practices and manage that locally. But in terms of decisions about where we employ that strategy, it's a market-by-market decision.

And then I just wanted to talk about supply cost. Obviously, tariffs have been a topic of discussion lately. You've mentioned that you have some pretty good visibility consistent with your other members of the HealthTrust GPO and maybe kind of refresh us on what you're seeing there and if anything has really changed in your outlook since we've seen kind of a little bit of a pullback in the tariff concerns.

Yes. We feel really good about where we're at. We've not seen any increases relative to tariffs at this point. We have price protections out there through our GPO contracting. The majority of those contracts are 3-year contracts. Now thinking about probably 1/3 of those expire each year. A year from now, you could potentially see some vendors looking for price increases if tariffs are in effect. But in the near term, we feel good about the protections we have in place. We also have the leverage of the GPO. So as they do think about price increasing, how much of that actually flows through to us, I think will be a little more limited. Maybe an unintended benefit of having put in our ERP is it will make it much easier for us to move market share. And so if we do run into situations where a vendor is trying to increase pricing, now that we have complete visibility over the entire enterprise of what's being purchased, how much is being purchased, and we're actually making those purchases centrally as opposed to each hospital doing their own purchasing. We can move market share much more quickly. And in many of these supply areas, it's a pretty competitive environment. So we think we could probably find someone and be able to mitigate any cost increases. And then as we -- as time passes, I think we're also seeing maybe a little less pressure on the tariff side as some of the deals get struck, and we're seeing it's not going to be as bad as maybe some had anticipated.

Got you. And I wanted to move along on to some of the development activity you guys have done, particularly with the physician practice expansions and some other outpatient care sites that you've put in place. Kind of how is that developing -- development going? And kind of how are you thinking about capital allocation to those types of initiatives?

Going very well for us. So maybe most recently, I'll speak to a couple. We acquired 10 urgent care centers in the Tucson market in the fourth quarter, adding on to the 7 that we already had in that market, but expanding that footprint through an acquisition of Carbon Health. Those have gotten up and running and contributing probably quicker than we expected. So that's been very helpful as another access point for us. We continue to invest in some -- expanding some of our ASC footprint with a couple of ASCs this year already that we've opened and probably we'll target 5 to 8 new ASCs this year. We've got a couple of additional freestanding emergency departments that are in flight and we'll be opening up this year. So continuing to invest probably half of our capital will be kind of growth capital. And we don't have any large inpatient projects ongoing right now. So the majority of that growth capital will be kind of service line oriented or access point oriented versus over this past year in 2024, we had 2 pretty large inpatient projects. We had the patient tower in Knoxville, Tennessee that we opened up at the end of Q1 and then a patient tower in Foley, Alabama that we opened up in Q4. Both of those fully open now up and running, beginning to get filled up. But those are -- were more expensive kind of inpatient where we had capacity constraints in those markets. So we're adding beds. Now we're focused on some more outpatient.

And then what's the -- remind me the time line on that Foley and Knoxville plant in terms of getting them fully ramped.

Yes. They probably have fully ramped 12 to 18 months.

Got you. And then just on -- continue on the investment front. In terms of inpatient capabilities, I know we've seen this outpatient migration, we seem to backfill with higher acuity -- capabilities. Any kind of investments in particular that you're targeting for your inpatient surgical or otherwise oncology or any other capabilities that you're focused on?

Absolutely. Oncology, one, cardiology probably being a big one, neurology and in a couple of markets, oncology. We've built out some oncology departments. So some -- but all of those being a little higher acuity, and those are areas of focus. In some markets, it's orthopedics, but we're pretty well covered in orthopedics in most of our markets. But I would say cardiology and neurology would probably be the top 2.

And then I want to spend -- make sure we spend some time on capital structure, a lot of movement in the capital structure with some refinancing transactions and call on some bonds. Maybe you can kind of recap kind of what the outlook is and kind of where you think leverage could shake out kind of long term as we get through some of these transaction?

Sure. So we exited the year at 7.4x levered. In the first quarter, just to recap, we refinanced $700 million of 2027 bonds, pushed them out to 2033. And then we used our asset sale proceeds and called our 2028 unsecureds, captured some discount on those. Exiting Q1, really before we got those transactions completed, our leverage was down to 7.1x with capturing some discount on paying down the unsecureds that should help lower the leverage slightly further. And then we announced the divestiture of another hospital in Texas, which we should close at the end of the second quarter, early third quarter, which if we use those proceeds, which we intend to do to further pay down debt should take us -- take the leverage down a little bit further. So I think we're looking at something easily with a 6 handle kind of mid-6s kind of by the end of the year. Then if we think about the DPP programs, which we talked about earlier, we had not yet included Tennessee and New Mexico in our guidance. But we fully expect those programs to get approved. And if they get approved on an annual run rate basis, that's about another $100 million to $125 million of EBITDA, which will further kind of boost EBITDA and lower our leverage.

That's an interesting point you bring up with the Tennessee DPP. Any overall thoughts on kind of the holdup on the 1115 waiver to this point? It sounds like the funds are approved, but the mechanism still is kind of in question. We've heard there's a lot of activity in Washington over that. Just wanted to get your thoughts on anything structurally in Tennessee that's different that could be kind of the hanging point there.

Yes. I mean we fully expect it to be approved. I don't think CMS would approve -- would have approved the preprint and the structure of the plan had they not intended to continue on with the remaining approvals. The hold up, we knew all along with the change in administration and having an interim director at CMS that they were not going to issue any approvals until you had a permanent director. Dr. Oz was sworn in over the past month. And since that time, a number of approvals have started to flow-through. And we've seen another -- a number of other states and other programs be approved. We saw a couple of weeks ago, at least the preprint for Tennessee got approved. So in our view, it's just a matter of time and for this to kind of work its way through the system and the approval will come.

Good deal. And just maybe you can just get back -- just back to the divestitures. Any other -- as you kind of look at your remaining portfolio, kind of where are we in the -- in kind of determining what the kind of the going run rate portfolio looks like versus other potential acquisitions? Is it more kind of valuation that's kind of driving the decision? It sounds like you guys have gotten some good double-digit multiples on some of the sales, which is great to hear. But kind of what's driving from here kind of how you think about the going-forward platform?

I think we're in the later stages of the divestiture program. But that being said, we'll continue to evaluate markets. Markets change. Market dynamics change from time to time. I think the most recent one that we announced was a good example where a couple of years ago, we had some inbound interest. We're not interested in selling it. But because of some of the changing market dynamics today and the fact that we had actually improved operations in that market, we maximized the value by waiting. And I think if we look ahead 5 years from now, the current operations will be harder to hold on to. So I think that, that turned out to be a very good deal for us. And we'll continue to evaluate markets with a similar fashion, really extending our horizon out further. And I think the company has really improved in how we do those evaluations and not just looking at current performance, but looking at where -- what performance could be down the road in making those decisions. So is there anything currently kind of on our mind about, hey, we need to move quickly and sell? Probably not, but things could change as we get in and look to where we want to optimize, where we want to make investments because similarly, opportunities in some of those markets improve as well, and we may want to pivot and invest more in certain markets.

Got you. Well, I think that brings us right to time unless there's any questions from the audience. Thank you very much.

Thank you. Appreciate it.