Community Health Systems, Inc. ($CYH)

Great. Welcome back to the Barclays Global Healthcare Conference. I'm pleased to welcome Community Health Systems CEO, Kevin Hammons, on stage with me here today. Kevin, welcome.

Thank you. Thanks, Andrew, for hosting us today.

Kevin, now that you've been as CEO for a few months, it would be helpful to start with a high-level overview of your current strategy and assessment of what is working well within the organization and what are some of the areas that you're focused on improving?

Absolutely. And I had an advantage of having a long career at CHS. I've been there just over 28 years, having spent the last 6 years in the CFO seat. As we move forward, one of the things we've done early this year, leading into this year is we rolled out a new vision, and that is to make the health care experience exceptional for our patients, our communities and each other. And to really make that happen, we're focusing on top priorities of quality and then patient experience, physician experience and employee satisfaction. Not novel ideas, but certainly something that we are now bringing kind of a discipline, bringing a focus and a prioritization to how we work. So we're organizing around those top priorities more formally than we have in the past. And I think it's going to position us well to be the provider within our markets to take market share and to grow both organically and inorganically within our markets.

Great. And as you think about the portfolio, community exited 2025 with improved free cash flow, lower leverage and a portfolio that's been reshaped by recent year divestitures. Could you share an update on the handful of deals you noted that are currently in flight already? And what are you seeing for 2026 from a divestiture standpoint?

Sure. One of those deals that was in flight just got announced. Last few days in Northwest Arkansas, we have 4 hospitals had been working on that for some time and got that one across the finish line. We have another deal sizably larger than that, again, currently in flight. But just kind of ongoing conversations at this point, some due diligence going on, and we'll see where that one takes us. Beyond that, we still have inbound interest, but probably nothing that we have a lot of interest in selling. So we are getting close to the end of probably that more formalized divestiture program should start slowing down from here, but we've gotten a lot accomplished already this year.

And as you approach that steady state on the portfolio, what leverage range are you targeting for that -- for those hospitals?

We are -- for that core group, and we have kind of a medium-term 1- to 3-year target out there of being below 5.5x levered. I think that's been a target that we've set for ourselves. Once we get to that state, I believe we're at that point in kind of a virtuous cycle, we would be generating sufficient free cash flows that will allow us to propel us forward in continuing to reduce our leverage from there without having to transact any further. In fact, I think we're already -- the value proposition of divestitures is changing for us when our leverage was higher and prior to being free cash flow positive, there was a greater value proposition for us to divest an asset. Now that we've turned free cash flow positive, our leverage is coming down, and that value proposition is changing.

Great. Let's shift to the current volume environment. Throughout 2025, both community and the broader industry experienced some softness in elective outpatient volumes. Can you talk about the key drivers behind that softness and how you expect those trends to evolve in 2026?

We believe that a key driver of the volume softness in '25 really centered around the economy. We saw strong consumer confidence exiting 2024, and we had a strong fourth quarter of '24, relatively strong performance in Q1. But then as a lot of headlines started to be printed around the impact of tariffs and concern around tariffs, cost inflation, potentially higher inflation, we saw the consumer confidence in kind of that March time frame really drop off. And likewise, kind of the following quarter, we started to see lower, in fact, negative adjusted admissions in the second quarter of last year. As consumer confidence began to recover throughout the year, we saw some volume improvement. As I think about where that was most concentrated and impact on patient behavior, with concerns over the economy, it really impacts your commercially insured patients who have higher co-pays and deductibles significantly more than your government insured patients. And that's really how it played out for us. We saw the drop-off in commercially insured elective procedures, largely surgeries, which we believe is more a deferral of care versus -- because they're concerned about paying their co-pay and deductible. As they met co-pays and deductibles throughout the year, we saw some recovery in the back half of the year. But as I've pointed out, in December of 2025, we saw consumer confidence dip again kind of leading into 2026.

Right. And we just saw a pretty weak jobs report published by BLS last Friday. To the extent we were to see a broader slowdown in employment, how are you positioning the business to absorb those headwinds and protect volumes and margins?

Really focused in with our new vision and our top priorities, focusing on differentiating our product, which is care and differentiating or really taking care of our customers, our patients and our physicians. If we continue to focus on those, when that volume does return, I think we'll be much better positioned to take that volume away from our competitors in our markets, capture that market share. So that's really where our focus is right now.

Great. And moving on to the policy side of things. You've included a $20 million to $30 million exchange headwind in 2026 guidance. What do you view as the most important variables embedded in that assumption that will influence how the year plays out? Is there anything to call out at this point on that assumption?

We do have lower exposure to the health exchange business, at least relative to many of our peers. A couple of things I'd call out. Our average household income in our markets is below the national average, somewhere in the high teens, close to 20% below national average. So even that health care exchange business, we largely see concentrated in emergency room visits. And we collect a much smaller percentage of co-pays and deductibles on that than -- relative to a normal commercially insured patient. So our realization is probably much lower on that business. I think we've taken that into consideration as we've thought about the impact of that on 2026. Even having said that, we're estimating around 20% of the volume declines, again, a lower percentage of exposure to us and probably a flow-through of something close to double our blended rate, but still maybe lower than others may have expected.

Right. And related to all of this, we are seeing a pretty significant buy down or shift in metal tiers from silver to bronze. What sort of impact do you expect that to have on utilization and acuity trends this year?

I think there's certainly an impact, people tiering down or getting -- I think some of that population may come out of exchange business, get commercial insurance. Some may go to Medicaid. Some will just tier down. How all that plays out, we just don't have enough insight into at this point to probably be very exact in terms of our analysis. But I think we've kind of considered all of that within our range of potential outcomes.

Great. And state-directed payments also remain an important part of this year's guidance, potential upside. I think your guidance excludes any benefits from any new programs. So can you provide an update on the programs still pending?

Sure. So yesterday, we heard that Georgia approved their program. We have previously estimated that in the $10 million to $15 million range. We have one hospital in the state of Georgia. We'll still sharpen our pencils on that one now that it's final approved, and we'll get the final plan. Florida, we're still waiting on. That one is similar size to Georgia, but we're still waiting on approval. And Indiana would be the other state that we're waiting on approval for. Unable to size that one, but we understand that the state of Indiana is working closely with CMS. Indiana has made some adjustments and amendments to the plan. So from our vantage point, we believe there's ongoing dialogue, which suggests it will likely get approved. But just waiting.

Right. And then on Florida, is it a similar situation where there seems to be some sort of friction with the program itself? Or is it simply just an administrative backlog that's taking a little bit longer than expected?

I believe it's an administrative backlog. CMS has been, albeit maybe slow from our vantage point, they have been trickling out approvals, and we're not hearing of any kind of large denials in terms of these programs. Our understanding is they received far more by multiples of submissions than they had expected. And I think there's just a backlog.

Great. And you've also talked about the rural health transformation program as being a potential benefit. Can you talk a little bit more specifically about that program and what sort of frame the potential impact it might have?

So the states that we're operating in, the 13 states are receiving a total of approximately $2.8 billion in 2026 for the Rural Health Transformation Fund. Those states have not yet communicated what those -- how they will distribute that money. Each state will likely be different. So what we've done is we've organized the team internally. We have some third-party assistants that have some expertise that we are ready that as soon as the states publish and are ready for us to start applying, we'll be there and kind of get in on the front end of that. What we don't know at this point is kind of what the criteria for either application or qualification for some of those dollars. Some of it may come and we expect it to be in the form of grants. So we'll have to do some grant applications, but all that's yet to come. The good thing, although we can't estimate, it will be a positive for us. Several of our states, Texas being the state that received the largest individual state amount allocation from CMS is a state that we have a good sized footprint in. Alaska, I believe, is up there, maybe the second largest state. There are not many providers in Alaska. We have one. New Mexico, where we have 3 of the approximately 40 to 50 hospitals in the state is another state that received a substantial amount. So I think we're pretty well positioned.

Great. Let's move on to some of the technology and AI initiatives that you're working on. Revenue cycle management has become an increasingly strategic priority for most hospitals, which RCM capabilities have driven the benefit to date? And where do you see the greatest opportunity from here?

Overall, on AI, we're really focusing a lot of our investments around our top priorities. So both quality of care, physician and patient experience, employee satisfaction. So investing in AI across all of those in terms of prioritizing. Specific to revenue cycle, there are some opportunities. We do all of our revenue cycle internally, but there are kind of applications that we're layering on some of which we started a couple of years ago with some internally built AI capabilities around like the appeals process. But as we move forward, really looking, I believe much of the AI is being commoditized. It's coming with a lot of your software applications being built into those software applications. So as we look for use cases around coding and collections process where there's some opportunity there, that will all get layered into our revenue cycle.

Right. And given how broad the opportunity set might be with some of these initiatives, how do you decide which ones to prioritize and how do you measure success of these programs?

Measuring success can be different for different programs. In terms of prioritization, I'd go back and focus on our top priorities as an organization around our vision. For instance, we're using AI to help identify patients who are at risk for sepsis that allow our physicians, they get alerted because the AI tool is running and scanning patient records and conditions and medical history and so forth, alerting physicians that a particular patient may be more at risk for sepsis. We can dose medications earlier, at least evaluate and make -- allow the physician to make that clinical decision. But that has helped us reduce sepsis mortality materially. So that's helping quality of care. On the patient experience side, utilizing AI for our call center so that when a patient calls in, they get an AI agent can help schedule that agent -- the AI agent can look at openings for physicians on their schedule and schedule a patient. So focus there on patient satisfaction. I think those are some primary ones. In the more administrative areas, we implemented our ERP. Last year, we completed the implementation. And with that ERP, they're developing Oracle is now embedding significant AI capabilities. There's over 600 AI agents now built into that ERP. That will help us on kind of the finance, accounting, supply chain, human capital management, scheduling, staff scheduling areas to be more efficient and take costs out. And those will have more of a direct kind of return on that versus on the quality side, maybe a little more hard to measure.

Right. Understood. Moving on to the cost side of the equation. Medical specialist fees remain an industry pressure point. You cited continued upward pressure in radiology and anesthesia with an expectation of 5% to 8% growth in 2026. So one, what's driving that persistence of this headwind? And secondly, like what has been the most effective in managing this down into the mid- to high single-digit range?

A couple of things causing the persistence, and that's each year, you kind of get a different group of physicians coming and wanting to go on subsidy type contracts. So it started off with hospitalists, ED groups moved to anesthesiology. Now you're seeing more radiology groups. Now what's working it down? A couple of things. We've been very effective at in-sourcing some of those groups, which allows us to take off the pressure of continuing increasing subsidies. We're also running out of specialty groups that we contract with. So there isn't going to be another group of physician specialists behind those that are already kind of coming and asking for subsidies coming on behind those. So I think we're nearing the end. I don't think those costs go down in the near term, but we're certainly seeing a moderation of the increase.

Great. And you talked a little bit about this on some of the ERP investments. But on the supply side, you've done a nice job of managing costs over the last few years, but it sounds like there's more runway left. Can you walk us through the specific sort of ERP-enabled initiatives you're focused on? And how we should think about the magnitude and cadence of these benefits you expect to realize?

So specific to supply chain, if you think about prior to our ERP, we had multiple 6 or 7 different supply chain systems across the enterprise. All of -- each of our hospitals would have a different item master or vendor master in which they used and contracted oftentimes locally or did the purchasing -- made purchasing decisions locally. With the ERP having a single integrated system across the entire enterprise, we're able to aggregate that information, provide much better decision support, and we've centralized all of those purchasing transactions in a single shared business office. So that in and of itself helped us capture significant -- some significant savings this year. Going forward, as contracts expire because a lot of those contracts are multiyear, so you can't get to all of them immediately. But as contracts expire, we have an opportunity to consolidate, do more broader contracting, which should allow us to get better pricing even within our group purchasing organization, being able to concentrate, get more volume discounts by aggregating information is the runway for us, and I think there's opportunity there.

Great. Shifting to capital deployment. Community has described shifting their incremental growth CapEx toward outpatient access points and higher acuity service line investments. Can you help us understand where that capital is being deployed today?

There's a number of areas. So we've kind of wrapped up at least currently some of the larger inpatient projects that were multiyear construction projects. And those are, at least for the moment, kind of behind us. So looking at things like some ASCs, freestanding EDs, urgent care centers, some additional physician practices and then also supporting some service lines where we're expanding some of our heart programs. So we're adding Cath Labs. We may be going from 1 to 2 in a market or 2 to 3 in a market as we expand those programs, upgrading, updating some of the imaging equipment to take advantage of some expanded higher acuity services and give us access. So that's really where we're targeting right now.

Great. On the cash flow side, you've called out a material cash flow headwind from an extra pay period in 2026. That does not impact EBITDA. But how should we think about the underlying free cash flow conversion through that disruption? And what working capital and other offsets are there? And are you assuming in guidance?

Still projecting to be cash flow -- free cash flow positive for this year, even with the headwind. That was a big turning point for us last year to get to positive free cash flow, and we want to make sure that we manage our way to continue being positive going forward and then creating a tailwind for us into 2027. Some of the offsets to that payroll headwind this year, there are a number of them, none individually large ones, but a lot of smaller ones that we have some line of sight. Some of them are already locked in. Some of them just we'll have to go get. But it's everything from -- I think there's some SPP money from some of the increases that the cash still hasn't fully flowed through. So that's one that is already locked in. We'll be getting that cash here in 2026. We believe we can reduce our days AR by another day. There's some AP headwinds that we had extra accounts payable payments in 2025 that won't recur in 2026. So that should be a little bit of a tailwind. We believe our malpractice settlement claims should be lower in 2026. Inventory management because we just get more mature in using our ERP and our processes now that we've centralized our shared service center, we believe we can manage the inventory balances better. We have better insight into doing that, and there's some cash flow benefits there. So it's a number of things that will add up.

Great. Maybe last question here in the final minute. With the removal of the inpatient-only list, how are you thinking about the strategic priorities and positioning the company in response to that regulation?

There's still a number of decisions that will be subject to kind of the doctors kind of more of a clinical decision. But as we think about our portfolio, we are investing more in the ambulatory side with surgery centers, with outpatient access points. And I think we're really well positioned. We have a good complement. And as we think about our business, really no longer being just an acute care hospital operator, but a health care provider across the continuum of care. Everything from your initial clinic visit with the primary care through post-acute care services that we're offering in all of our markets and building out our networks, I think we'll be able to be well positioned to capture that.

Great. With that, we're out of time. So Kevin, thank you for joining us. Thank you. Enjoy the rest of the conference.

Thank you very much.