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

Okay. Fair enough. And then this maybe would have been a question related to the potential headwind from the exchanges. But I guess just as you look at planning for this operationally and trying to develop contingency plans that maybe would allow you to offset some of the potential impact of what that could mean? Like are there work streams like that, that are in progress for the company? Or are those just in addition to normal things you might be doing to improve margins? Like do you think there is some additional like cost opportunity or efficiency opportunity that you'd be able to go at specifically in response to what the exchanges might do over the next couple of years?

Right now, our priorities, and we have a number of kind of cost savings priorities ongoing right now. Those are more in the normal course. I would say, and not specific to some of the current regulatory environment because I think, one, there's a lot of work we can still be doing in the normal course to gain efficiencies, to take some costs out, our recent ERP that we've implemented, getting that stabilized, and there's still a lot of tailwinds that we should gain from the information that we're now gathering as a result of having invested in that program or that technology. As I think about specific to the legislation and what we might do there, I think it's further down the road. Those cuts really, particularly the Medicaid cuts don't go into effect until starting in 2028 and they're phased in over a 10-year period. And there's a lot that could happen between now and then before we wouldn't want to get too far ahead of ourselves in terms of taking a look at various service lines and so forth, although probably some early planning would suggest that there's service lines that if Medicaid was not funding that we could scale back on.

Okay. And you've also talked about trends on denials as kind of being a stubborn pressure point for the company. Just update us, I guess, what you've seen as you've moved throughout the year on denials and what's your expectation for denials through the balance of the year?

If you recall, in the third quarter of last year, we saw a sizable step-up in denials. It's been pretty stable since that time. Denials haven't -- payers haven't pulled back any. It's still -- we're still seeing increased denials but it hasn't proportionately gotten worse. So it's been relatively stable over the last couple of quarters. And I would think that over the remainder of the year, it would stay at the levels that they're at. But we're not seeing any relief at all from the payers.

And this is -- is it broad-based from insurers that have different business lines? Is it primarily concentrated in commercial or Medicare or somewhere else?

It's primarily concentrated in Medicare -- in the Medicare Advantage space.

Okay. And then just to think a little bit about the commercial rate environment. I think we went through this cycle where the industry as a whole saw a pretty intense bout of wage inflation and helped kind of put upward pressure on commercial rates over the next couple of years. It feels like we could be getting to maybe the end of those above trend type rates. I guess as you negotiate contracting for 2026, what do you feel like you're seeing from the payers in terms of their willingness to provide rate updates at the same level they have over the past couple of years?

We're still seeing some pretty good rate come through similar to the levels over the past couple of years. So that tail with some of the inflation coming in seems to still be benefiting us on the rate negotiation. So I'd call it on average, 4% to 6% rate increase on the commercial side, which is where we've been kind of the last 2 years. So I think it's beneficial. Historically, we were in more of a 3% to 5% range. And right now, as I think about 2026, we're about 75% of the way through our contracting for next year and still seeing a little higher level of rate increase pull-through.

Got it. And then it's an interesting contrast because on one end, you have the denials. But I think on the other hand, there's been a lot of focus, especially recently across the industry about opportunities to use technology to leave maybe like less financing and like less yield on the table when you're dealing with payers. I guess where do you think about where you're at in the process of maybe these initiatives that could, over time, improve your yield? And how much visibility do you kind of have to driving that yourself versus your RCM vendors?

So we are investing a fair amount. We've been doing a lot of work on the side to kind of reduce denials to improve our coding. We are using some technology in both those. We're using some AI to generate appeal letters and to help in those collection processes to mitigate had we not -- and even with those efforts, we're kind of stable where we've been from a denial perspective. So I would say had we not been investing and putting forth some of the additional efforts on our side, the denials would continue to get worse because I think similar to what we're doing, I'm sure the insurers are investing in technology and use of AI on their side to mitigate their cost as well.

Yes. I think that's fair to say. And then obviously, as we think about not so much we haven't seen it, we've touched on tariffs kind of earlier in the discussion. Latest thoughts on, I guess, exposure to potential tariffs. It still seems like it's a moving target. But like what do you see as those discussions continue to evolve?

We've been fairly well protected through our group purchasing organization, HealthTrust Purchasing Group and having longer-term contracts a pretty significant portion, I think, around 50%, if memory serves me right, of our purchases are domestic purchases. We have a relatively small amount of purchasing coming from China. So we haven't seen much of an impact from the tariffs yet. Now what we don't have complete visibility into is like raw materials, even where we're doing domestic purchasing, if some of the raw materials for the manufacturing are coming through and will flow through. But right now, the majority of our contracts are 3-year contracts. So only about 1/3 of those turn over each year where we're having to renegotiate. We've not seen any noticeable increase in kind of pricing outside of normal inflationary increases.

Okay. Can you maybe spend a minute updating us on divestiture pipeline? You've gotten this most recent deal done and now reflected in your guidance, but where the discussions around potential divestitures stand? You've completed a lot of these over the years. Just how fruitful do you think the remaining opportunity set is?

So we don't have any particular or specific deals right now that we've talked about. I would say that there are several opportunities that are in flight that we have some inbound interest. We've been having conversations in a couple of different markets with several different buyers on some potential transactions. A little early to say yet where those will come out. I would say that it's highly likely that we'll continue to pursue some divestitures. I think given where we're at September already, time flies, doesn't it -- this year that I don't think we'll get anything else done. It's unlikely that we would have another deal completed this year. But if things continue to progress in our conversations, first half of 2026 is likely we could get something done, and we'll continue to work on those where they make sense.

We do have not a hospital divestiture, but we've got the outsourced lab business that we've announced that we expect to close at year-end. It's about $200 million.

That's a good point, yes.

And we expect another $100 million of proceeds related to a divestiture of a hospital in Tennessee last year that was contingent upon the DTC in the state and that we should be coming in, in the fourth quarter.

Okay. Good to know. Do you feel like the conversations have gotten any more complicated because of the macro uncertainty or because of the policy moving parts around potential deals?

I can't say that it's changed a whole lot. I think it impacts certain buyers differently. Certainly, with the Big Beautiful Bill has impacted at least in the near term, the academic, probably more so than the for-profits or even some of the other not-for-profits just because of the loss in grant funding and some of the taxes on endowments, which go into effect immediately versus others of us who -- the issue is more on the Medicaid funding, which is deferred and may not actually occur. So I think that's changed a little bit of the dynamics in terms of who some of the buyers could be or how they're looking at it. But overall, I would say there's still a fair amount of activity and interest. And I haven't seen any change in real valuation discussions.

Yes. And a similar theme, I mean, as you think about your competitors and their willingness to kind of either deploy capital either on like deals or kind of their own just internal CapEx plans, do you think there is like a real kind of like pause out there at the moment? Or do you think that you and the rest of the industry feel like in your markets that things are going to be pretty similar to how they've been in the past couple of years?

I think for many of us, our view is things will be pretty similar to how they've been the past couple of years. Again, I think the pause in some spending is probably focused more on those that have more near-term impact from the regulation. And those of us that don't have a near-term impact are seeing things a little differently.

Got it. Okay. And then in terms of the company, you have these medium-term targets out there. You have like a mid-teens EBITDA margin that you're going to be looking to strive to over the next few years. Like what do you think are the key areas of execution that will be required to kind of march towards those margin targets over the next few years?

Some of these programs are certainly beneficial to us kind of the return of the volume, and I know we're experiencing a little softness right now. But as I mentioned, I think that's transitory. And as that volume comes back, particularly the volume on the commercial side should be accretive to EBITDA. And so that will help us pretty materially, I think, even on the margin profile now that as we've gotten some of these other divestitures done, we are close to getting to free cash flow positive. And I think on a trailing 12 months basis, as of June 30, we were just slightly negative, which is a material improvement over where we had been historically. And I think we've seen a steady improvement in that area over the past 8 quarters. So that kind of flipping to positive also allowing for some additional reinvestment or some deleveraging will really help jump start us getting to those medium-term targets.

Okay. And then, yes, just Project Empower, obviously, has come up a bunch now. In terms of the sort of the key milestones there, I guess, like where do you stand in terms of things that have largely been kind of completed and put into place and things that are still kind of in front of you over the next couple of years?

So all the technology implementation is complete, really effective 1/1, we got all the technology in. The company is running on the full integrated platform now. So what we're working on this year, and we're already starting to extract value from it as we're turning off some of the duplicative software systems that we've replaced. Some of those are turned off already. Some of them, their expiration of their contract will come up throughout the year, and they'll effectively all be turned off by the end of the year. But that is just incremental value to us as we turn off those excess costs. The insight we're getting into the supply chain now that we have our entire enterprise on a single integrated system, a single item master from a supply chain perspective is giving us more insight in terms of how we contract. So it kind of ramps up over time as we renegotiate some of these contracts, we have better visibility into our spending. We're able to do more bulk buying and leverage our scale in a different way than we have to in the past. So we'll extract benefit this year, but I think it will continue to grow probably over the next 2 years, getting value -- increasing value out of that.

Got it. And then obviously, you have targets to delever the company and a combination of that is happening through actions you're currently taking on the balance sheet and a lot of that will come through delivery of these EBITDA margin targets that you set for yourself. Just kind of walk us through the key pieces of like how you think you get from where leverage is today to where the targets are a couple of years out?

It's a balance. Some additional divestitures will take place where we'll be able to use proceeds to pay down some further debt. And as long as we're selling or completing those transactions at favorable valuation multiples, that should be delevering. And then growing the core business, and we see some good growth in our core business and the balance between those 2, we've brought over the last 8 quarters, our leverage from around 8 to -- now it's around 6.8. And that should be -- we should be able to take another turn plus out of that and get us to our midterm targets of 5.5 or below.

Okay. Great. And then just in terms of maybe just the last couple of questions would just be sort of CapEx priorities and how those have evolved over the past couple of years. I know that as you're evaluating assets for potential sale, maybe there's like changes in how you approach CapEx. Do you maybe have more of a set of assets that you seem like reasonably sure will be with the company for the next couple of years? Like where do you need to spend CapEx to deliver on that core growth over the next few years?

Over the last few years, we've made a couple of large CapEx expenditures or projects more on the construction side. We've added patient towers in Knoxville, a large patient tower in Foley, Alabama. So those were assets that were at capacity from an inpatient perspective that we wanted to build out additional capacity for growth. Those are both completed. So currently, we don't have any large construction replacement hospitals being constructed. So we'll be able to focus a lot more of our capital on outpatient access points. Those are less expensive, quicker to market type projects, probably pivoting some of those dollars to maybe even acquiring some clinics. We acquired some urgent care centers in the fourth quarter in the Tucson market is an additional access point. There's some ASC development going on. We've got 3 ASCs that we'll be bringing on board between now and the end of the year. We've got a couple of freestanding emergency departments that are in flight. Those are kind of de novo builds, but they're relatively quick to stand up and lower cost point to build a freestanding ED. So we'll continue to pursue those type of investments around our networks of care.

I guess how different is like the return profile, like dollar of CapEx on outpatient versus dollar of CapEx on like inpatient?

It depends on the market. It's really largely dependent on the market around the payer profile. And a lot of these access points really, you have a return on the outpatient side, but you're also, as an access point, it becomes a referral source as well in terms of bringing in additional inpatient business. So if you're picking up additional patients in an urgent care or freestanding ED, oftentimes, they're coming in with higher acuity needs, but then that patient gets transferred to the hospital. And so you're picking up the higher acuity services there as well.

Okay. I think that's about all that we have time for today. Thank you very much for coming. It's great to see you. Thank you.

Great. Stephen, thank you. Thanks, everyone, for joining us.