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

All right. We're going to go ahead and get started. With us today, we have Community Health. On the stage is Kevin Hammons, CEO; and Jason Johnson, CFO.

Kevin, I'll start with you. You are now a CEO and both of you, congratulations. As the CFO, you knew the numbers, you knew all the facilities. What have you learned as CEO? I know it's been a short time period, but what do you think is going to change as you take on this new role? And what would you do differently?

Thanks, Rishi. And first, let me say thanks for hosting us today and for everyone joining us. As I think about maybe what I've learned in the period since the transition is how important the vision is for the company and making sure that everyone across the entire organization is aligned and working kind of towards that. I think as I kind of view the company and there were so many things going on, and I had the benefit of having had a seat at the table, working very closely with Tim on strategy. But we, in many instances, had competing interests going on. And so working with the company over the past several months, coming up with kind of a single vision, top priorities being quality of care, physician experience, patient experience, employee satisfaction. And we're still focused highly on cash flows. So at the end of the day, continuing to delever the company, continuing to improve our free cash flow generation so that we can be investing in growth are top priorities. But some of those levers in terms of how we get there is really focused on those experiences, which as we improve quality, improve our patient satisfaction and physician satisfaction. I think it will lead to us being able to take more market share as we establish ourselves as the best provider in each of our markets.

Maybe let's shift to the macro side. In the past, you've noted that the consumer softness and that's had an issue on outpatient admissions, et cetera. What are your thoughts for '26? And how do you -- how has this affected your guidance?

So coming into 2026, we saw consumer confidence index drop at the end of the year kind of in December. The last time we saw the consumer confidence index at those levels was back in March of 2025, and we saw a pretty soft second quarter following that. Consumer confidence improved throughout the year and then dropped again. So certainly, starting off the year, we have some expectation of some softness around volumes. Our hope will be that consumer confidence continues to improve then throughout the year, and we see it pick up, particularly in the back half of the year. I think all that's contemplated in our range of guidance. But overall, I would say our volumes in our guidance are probably low single digits, a little bit lighter, but we're seeing some improved rate as well. So still kind of in that mid-single-digit 5% net revenue range for improved net revenue for the year.

And just on that improved net revenue, obviously, we have a general understanding where Medicare is, where commercial pricing is going. But with embedded in that mix, how should we think about denials?

Denials are fairly stable right now. I think that's a result of a couple of things. I think payer behavior continues to put pressure on us. We're seeing increased numbers of denials, but the work that we're doing internally to combat that is allowing us to stay kind of stable. So we've not seen kind of a net increase for some time.

Now I think your guidance was well within expectations. The one area that we've been getting questions on is your guide for operating cash flow. We talked about it in terms of -- and it's specifically around working capital. You have the extra payroll, which is a few hundred million. And then I think your net-net was about $130 million, $180 million of working capital benefits, which would imply that there's probably over $300 million of working capital benefits to offset that payroll period. Can you just walk us through your comfort level in those buckets as to what's driving that?

Yes, I'll take that one, Kevin, and thank you for having me. There's -- the extra pay period happens every 11 years, and that's $140 million that look to step over next year. So we do think that we'll have positive free cash flow. It will just be more modest next year. We have identified a handful of opportunities to improve free cash flows next year. Several of them are related to accounts payable. We had some buildup this past year. from our conversion to ERP system that we had to pay out. And then we can continue to improve how we manage our AP. Inventory turnover is another area that we're able to focus on better with our new ERP. We've got -- on the AR side, trying to take a day out of the AR turn. And we've got AR collections on divested hospitals where we retain AR, so you lose the revenue, obviously, but we continue to have the cash. So all of those are pretty fairly equally spread. I think there's opportunity to achieve slightly positive free cash flow.

On DPP. So 2026 does not include any out of periods, does not include any DPP that could come from Texas, Florida and Indiana. But can you just update us on what you're seeing out of the 3 states? Obviously, the big focus is being Indiana. There seems to be some challenges that's the question.

Yes, you want to take Indiana?

Sure. I'll take Indiana. I'll let you take the other states. I mean Indiana is going back and forth with CMS now for some time on their program, they did a preprint. They've been working closely with CMS. They've adjusted their program and resubmitted an amended program. We don't know exactly what the structure of the resubmission is. But from our vantage point, the fact that CMS is working closely with the state indicates that CMS has not said no. And they allowed Indiana to make those adjustments. I believe that, that signals an increased likelihood that a program gets approved in Indiana. In terms of quantifying what that is, we don't have the information to be able to do that. But I think the likelihood of a program getting approved is greater.

The other 2 states are -- it's actually Florida and Georgia. They've submitted and that's more normal course. They're, I think, in the queue awaiting approval. I know there has been activity recently where CMS has approved some of these programs, including one in Georgia. It's just not the one that is impactful to our hospital there. In a few years, we have the Oba cuts coming through, specifically on the DPP side. We've spoken about what you may do to mitigate those cuts. It's been 5 or 6 months. How are you guys -- can you maybe just walk us through how you plan to mitigate those cuts? And when do you anticipate starting that mitigation effort?

I think we've. Already started. There's a number of cost-cutting kind of margin improvement or impact initiatives that we have ongoing, things that we do every year, but particularly around the ERP, I think there's some runway. There's a couple of years ahead of us still on benefits that we can extract out of that, improve our margins, take costs out. Oracle itself is adding significant capabilities to the ERP, particularly around AI. And I'm sure we'll talk a little bit about that here in a moment. But as they add AI components into the ERP, that should allow us to add additional efficiencies, take out additional costs out of the process. And as we just continue to mature our own workflows with the new ERP, I believe there's cost savings that will help mitigate some of those.

Is the anticipation that you'll mitigate pretty much 100% of the cuts, 80% to 60% of the cuts? How should we think about that?

I think the majority of the cuts will probably be mitigated. We've estimated now is -- with our divestitures, now the new estimation is $250 million to $300 million of cuts over the period through 2038. So I think efficiencies over that period of time, we'll be able to mitigate that.

Asset sales. In the last call, you said that these sales are dwindling. Can you -- maybe just one, talk us through the last -- or the Huntsville, Alabama asset sale is one of a few that's still remaining as part of what you had communicated in Q3. Can you quantify how many that you're actively pursuing in terms of asset sales? And then when you say dwindling, is it less than what we saw last year? Is it -- how should we just think about '26 as the setup for asset sales?

There's still a couple of deals currently in flight where we have inbound interest, but not far enough along that we would be ready to talk about those deals or to know with certainty that they'll get across the finish line. It would be less in terms of quantum than it was in 2026 -- or 2025, I'm sorry, excluding what we've already got done in 2026. So at the end of the day, 2026 will probably have greater assets.

And the ones that you're working on, are they similar in size relative to what you've seen before? Or are they smaller, larger?

Both. Yes, I would say there's a smaller deal. There's one that's similar of size.

Okay. The Clarksville sale was unique because you had the buyer dealing with maybe competitors coming in. And I'm not sure if that was in any way associated with Commerce. But I believe under the rule fund to access some of the dollars starting in '28, there has to be -- states have to eliminate anything that impedes access to healthcare. And that is, I believe, some of the comm laws. Tennessee is looking to eliminate their comm laws. Has that accelerated or changed how you guys are thinking about your assets in general?

Not really. No. We still have a couple of states that have CON rules in place, although Florida has now eliminated them. Tennessee is working to eliminate them. Many of our states don't have CONs. I think where we really looked at Clarksville, we had a situation where you -- we had 2 new entrants into the market regardless of how we operated there, that market was going to get diluted. And as we looked at longer horizon on EBITDA generation and on capital requirements to compete in a much more competitive market. And the competitors coming in had the advantage of rates because of their presence in Nashville. They had much higher rates than we did. And then we get a really good offer that allows us to delever. So it was more of an opportunistic transaction for us.

Where do you stand in the Alabama process? A lot of questions on whether -- how the FTC is going to view that sale. Where does that stand today? And when do you think -- what's the updated timing of closing that deal?

I think the updated timing will be second quarter of closing that deal. And we don't believe that there are any impediments to getting that closed.

Can you update us on the rule fund? There's been a lot of delays. Where do we stand today on that process?

Yes. I'll take that one. So we do know that our states, the states in which we operate have been allocated $2.8 billion in this first year. And they are in various stages of determining how those funds will ultimately be used. There's some approval that will have to happen for the state budgets to be able to extend them. We formed a governance committee to make sure that we've got the right strategy, and we can evaluate each of those. There's a couple of states that have already asked for some indication of interest, and we're participating in those. So don't yet know what the impact could be from -- to us. It will be beneficial, but we probably won't know until later this year. And timing-wise, these will likely -- the cash probably won't come -- start coming down to providers until definitely the second half of this year.

But retroactive to the beginning of the year.

That's right. And you actually have until, I think this first year will go into the federal fiscal year, which will end in '27. So there's a little bit of a -- the 5 years will kind of be spread out a little bit...

There's been a lot of questions and concerns around Medicaid, less to do with hospitals, but would love to just get your thoughts in terms of what you're seeing in the Medicaid environment. And I know it's a midterm year, you're probably not going to see states becoming too aggressive, but how are states just also addressing or thinking about Oba and what they may have to do to offset that impact? And how does that kind of trickle down to the Medicaid aspect of it?

Yes. We've not seen the states that we're in take any real action to this point around Medicaid. So we're thinking at least as I look at 2026, it's pretty much status quo on Medicaid.

Okay. Supply expenses. Some of the GPOs have just noted that there could be some natural price increases just based upon how things roll off, new contracts, et cetera, some of the tariff costs from last year might have to kind of flow through to potentially some of these hospital systems. You're protected, generally speaking, from my understanding under the GPOs. But what are you estimating in terms of -- what are you seeing in terms of price increases in '26? And is there a headwind that we should anticipate, whether it's later this year or in '27 as it relates to some of the costs that we saw last year?

Yes. So we're a member of the HealthTrust GPO, which we have an equity ownership. And for '26, our contracts generally renew on a rolling basis every -- I think it's about every 3 years, so about 3 or so every year. '26, I don't think we're going to -- we're not expecting to see a significant increase, nothing more than inflationary increase. The GPO takes certain actions to mitigate those risks to make sure that we have the right types of contracts and products. And then we do the same on our side with our new -- with our ERP. That's one of the advantages that we can really see across the system to determine to make sure that we're purchasing on contract. We're not just on contract, but making sure that the preference that we're using the right items that have the best price. So in the near term, no, in the long term, I suppose that if there's a 10% tariff on everything that over time, that you'll see everyone will see it.

A couple of things I might add. Over 50% of our supply purchases are domestic purchases. So there's some level of protection there, although we don't have clear insight into where some of the raw materials may be coming from. But we don't have any significant exposure to some of the locations that have the risk of higher tariffs. So I think that's a mitigating factor. And then as Jason mentioned, with the work with our ERP and some of what we believe we can mitigate a significant portion of the cost increases by being more efficient, purchasing either different items or the right items and being more compliant within the GPO.

Okay. Just on labor, can you just walk us through your full-time and just agency exposure today? Do you think it's at the optimal level? Or do you think that there might be?

I think we've stabilized. I think we're at the optimal -- the level of use of contract labor. Not expecting any significant increase next year.

Okay. On the professional expenses, you noted that it will increase this year, but not as high as 2025. Is that just because you're pushing back on the subsidies? What's driving that less of an increase?

Yes. I think it's contracting and trying to make sure that we are negotiating the best arrangement as possible. And when we're able to, to try to in-source rather than to use outsourced when that opportunity does present itself.

We're probably also running out of doctors who are just coming on to these contracts, too, because they've all kind of worked their -- most of them have worked their way through and are already getting subsidy payments. So at least in terms of -- it started with the ER physicians and hospitalist groups and then anesthesiology got to be big. Radiology is kind of the most recent one, but you don't have any other beyond that groups of physicians that we would be contracting with that would expose us to continuing increases.

So you've internalized at least mostly the ER side have not all of it. You've talked about radiology and anesthesiology. Walk us through the stumbling box that you see in internalizing some of these solutions because it's been talked about for a few years now, I get it, it's not easy. But what are you seeing in terms of, one, the challenges, but also maybe the opportunities on that front?

One of the challenges is availability and finding in terms of anesthesiology, anesthesiologists that are willing to come into the employed model. I mean there is a shortage of anesthesiologists. There's a shortage of radiologists. And as we think about radiology and what some of the technology will be changing that in the coming years, I think in some respects, they've accelerated and see they have a short window for asking for some of these subsidies. And so in some respects, they've accelerated our desire and the work that we're doing to go out and find alternatives to using whether that's remote -- doing remote reading, using technology. There's an AI component to radiology that can make some of those reads easier -- more easily done externally than having radiologists on site.

Okay. And we'll get to the AI in a second. But before we get to that, just going back through some of the pricing on the commercial side, all the big payers are getting hit left and right. Are you -- what are you seeing? Can you talk through your contracted rates for '26, '27 and just your visibility in the out years?

We're 3% to 5% rate increase for '26, and we're about 90% contracted for the year '26 and maybe 50% or so for '27. I not for '27, I think we're still expecting that same 3% to 5% currently.

Okay. Okay. Indiana bill, I think it was 4 or 5 was going to limit some of the not-for-profits in terms of how they price relative to commercial plans, if I'm not mistaken. That bill was passed last year. How has that bill affected community in Indiana or has it?

I don't think it's really affected us. Yes.

Meaning that you haven't seen the benefit of it or you just haven't seen -- because you do compete with -- I think IU Health as part of that process, if I'm not mistaken. And I'm not sure if Part B was also part of that because they're not-for-profits, I think they were being targeted?

Yes. There were, I think, what they call the top 5 not-for-profits, the most expensive -- the not-for-profits with the highest charges in the state. But the bill targeted them in their reimbursement. It really hasn't changed -- doesn't change our reimbursement. So it really hasn't impacted us, and we've not really seen any residual impact at this point.

And then IU Health has been building out that facility in Fort Wayne. Where does that facility stand today? And just your thoughts in terms of the competitive dynamics in Fort Wayne.

So it's scheduled to be open in 2027. So it's still some time off, and I'm not sure if they're on schedule or not with their construction. It is being constructed on the south side of Fort Wayne. And most of the -- in fact, the majority of the population growth in that market is all on the north side and closer to our facilities and where we're expanding our additional footprints and access points. So I mean, at this point, no impact at all from that facility.

So let's talk about the expansion of those access points. Maybe since you mentioned it, let's start with Fort Wayne, what are you doing in Fort Wayne, and then we'll kind of dive into some of the other markets.

And we're always looking for opportunities to expand, whether that's in surgery centers, freestanding emergency departments, both of which we've opened in Fort Wayne and are looking at other opportunities across a number of our markets, we'll probably open 4 to 5 freestanding EDs this year and probably 5 to 10 surgery centers. So those are key access points. We're also looking at urgent care centers, individual clinic opportunities where we'll either open up or acquire practices. So as we focus a lot of our capital, particularly this year, now that we've completed some of our large inpatient projects that we've had in flight over the last couple of years, I think 2026 will be largely focused on outpatient access points.

And as you think about the Fort Wayne market and expansion of the beds from just across the systems that are in that market, is that market getting deeper to support the number of beds that are being added?

Deeper in terms of?

Population.

Yes. I mean I think it is. And then as we focus on our service lines and making sure that we're offering the right service lines, taking advantage where there are opportunities, partnering with the right physicians. And we've got -- with our joint venture there, I think we're partnered with about 150 of the physicians in the market through our joint venture. So I think we've got a really good hold on the market. We've taken over that market in terms of numbers of births, babies, and in fact, we're now...

That's the case a few years ago.

It was not the case a few years ago. Park View was the biggest, and we're now the biggest in the market. So I think we're continuing to grow and do good work there.

Okay. And then you've been adding urgent care centers. So then talk through some of the other access points that you're adding throughout your geographic exposure and then maybe allocation of dollars towards that expansion.

In terms of allocation of dollars, it's a little over 50% of our capital would be related to growth capital. And even as we have divested facilities, our capital spending is remaining at least flat or slightly increasing. So we're spending more per facility in terms of capital and that additional growth or those additional dollars would be primarily related to growth capital.

And where do you see those opportunities? Is it in Tennessee, Texas? I mean Texas is obviously a very crowded market. I assume that maybe there could be some opportunities there, but where are you seeing that expansion?

We're seeing it a number. Birmingham continues -- we see great opportunities there, Naples, Florida, across Texas. These are growing markets. Those markets demographically are growing at a rate higher than kind of the national averages. So we're seeing tremendous opportunities across all those. Last year, we made some investments. And over the past couple of years in Tucson, we see some continued growth opportunity there as well.

With the inpatient-only list, I know you're adding ASCs in some of your markets, but has that accelerated maybe the focus on adding more of these ASCs? And how quickly can you ramp up in adding these ASCs because obviously, that comes with the doctors that you need to hire and find.

It does. That's a gating issue, particularly in markets the size that we operate in, is making sure that you're aligned with the right physician or group of physicians. In some cases, those ASCs, we could look to either partner with existing ASCs, acquire them, in some cases, are de novo builds. So it all depends on the market. But generally, that's a much quicker to market capital spend than an inpatient build, adding a tower, which we've done over the past couple of years in a number of markets where we've been coming up on capacity constraints like Foley, Alabama, in Naples, Florida and into Knoxville, Tennessee.

Have you seen in some of your hospitals where you're reassessing the inpatient, outpatient real estate just because there's more of an outpatient. We've heard that from some of the hospitals. Is that something that you guys are actively doing as well?

It is. I mean, certainly, we consider that as we think about the future, do our 3-year planning for markets and what capacity we'll need where we are today and what capacity we think what it will look like down the road. So certainly part of the equation.

Okay. So let's talk about your cap structure. You have a sizable amount of pro forma cash post these asset sales, not including Alabama for the time being. But you still have a sizable amount of cash. You maxed the 10% on the 32. I think you have one more remaining this year up to December, if I'm not mistaken. You have one more on the 9.75%. You're increasing your first lien capacity. So I just maybe starting first, where do you see that first lien capacity today? And then are you limited in accessing that first lien capacity while the 29s and the 30s, the first lien 29s and 30s are outstanding?

So our -- as we sit here today, we would evaluate our first lien capacity approximately $750 million. I think $745 million.

Excluding the ABL or including the ABL?

Excluding. Excluding the ABL. Given the quantum of proceeds that have come in over this past year and what we expect to come in, we will need to focus any debt repayments on first lien debt. But I don't believe that there's any restrictions on the use of that capacity even with the 29 and 30 first liens out there. So I don't believe that.

Okay. That's our view as well. just to make sure. So then as you think about what you have to use the proceeds towards with some of the 10% options not available, are you then focused on near-term maturities? Or are you just going to be opportunistic throughout the structure?

I think we will be opportunistic. But if we focus on the 3 tranches of 20 31, 32s and 33s, those do have the advantage of increasing our first lien capacity. So that is another consideration that we would certainly throw in the mix in terms of what we might target.

Okay. AI is a common theme in this event. How is community harnessing AI? And where are you using it? Where do you think it's actually been? Or where do you think it could be more beneficial to the organization? I know it's early stages, but...

I think there's a couple of areas that we're already using it. A couple of areas certainly we'll be targeting. So we are rolling out ambient listening. It's partially rolled out, starting with our emergency departments in our hospital groups and then moving towards our outpatient or physician clinic practices, which we've launched recently. So I think there's a lot of benefit there. We're already using some AI in our revenue cycle areas to assist with appeals and so forth. With our ERP, there is AI being built into the ERP itself kind of from Oracle that as we mature that process, we'll have a lot of opportunities to use AI to generate efficiencies in our transaction processing. Then there's a few other clinical areas like sepsis, like our virtual sitter program that has some embedded AI in it. So really across the spectrum, there's a number of areas.

What is the sepsis area with AI and there's obviously a big issue as it relates to hospitals, how do you...

Sure. So there's an AI component that can help us identify patients who are at risk for sepsis and then notify the doctors that gives them kind of an advanced notice on when to provide medication.

Okay. On the ambient AI side, being used in the ER, one of the issues that we've heard is just the noise. How is your use of ambient AI? Are you finding that to be a challenge in terms of all the noise that's within the ER catching everything that is needed? Or is it still kind of early stages?

We've not heard or at least I've not heard any issues around that at this point.

And has that helped from a collection standpoint, meaning that you could transcribe that data and immediately send it in? Or does it go through a few more steps and processes before you actually go through the collection process?

It still goes through a few more processes, and we're probably too early in our use of it to really have noticed a significance on the collection side, but certainly something we'll be monitoring going forward.

Okay. I wanted to save a little bit more time for the audience, but we have about a minute. If anyone has any questions, please raise your hand. No questions. If you think about where AI is going now, what do you think are the next steps? And where do you think you will need to actually invest in as it just relates to you looking across the spectrum?

I think it's an interesting question and our -- how we're thinking about it is probably changing over time. Early on, as we were thinking through AI, I think a number of people as they're thinking how they would use AI, we were focused on developing internally. Because the use cases were just being developed. As we sit here today and things are changing so quickly, a lot of those use cases are now -- have been proven. There's products out there. A lot of your software vendors are baking AI into their products already. So as we just refresh some of the software we're already using, you get your new license or renew your licenses, now that product is being updated and has AI components built in, in other cases, instead of going through a process to develop it, you can go out and buy a proven product that's being used somewhere else. So I think how we're thinking about it is evolving because the whole AI space has evolved so quickly.

Well, we've hit the end of our presentation or fireside chat. Thank you so much.

Thanks, Rishi.

Appreciate it.

Thank you, everyone.

Thank you.