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

Thank you. day and welcome to Community Health Systems second quarter 2026 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star, then 2. Please note this event is being recorded. I would now like to turn the conference over to Anton High, Vice President of Investor Relations. Please go ahead.

Thank you, Bailey. Good morning and welcome to Community Health Systems' second quarter 2026 conference call. Joining me on today's call are Kevin Hammonds, Chief Executive Executive Officer, and Jason Johnson, Executive Vice President and Chief Financial Officer. Before we begin, I'll remind everyone this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks which are described in headings such as risk factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC. Actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We've also posted a supplemental slide presentation on our website. All calculations we discuss today will exclude gains or losses from early extinguishment of debt, impairment gains or losses on the sale of businesses. and expense for employee termination benefits and other restructuring charges. With that said, I'll turn the call over to Kevin Hammons, Chief Executive Officer.

Thank you, Anton. Good morning, everyone, and thank you for joining our second quarter 2026 conference call and for your continued interest in CHS. Before we get into the call, I want to acknowledge the ongoing commitment and effort of all of our teammates and thank them for the work they are doing toward advancing our vision to make the healthcare experience exceptional for our patients, our communities, and each other. I am proud to say that in the face of a dynamic operating environment, we have continued to make progress on our top priorities of improving quality, physician experience, patient experience, and employee satisfaction. In addition to improving leapfrog safety grades and CMS star ratings that we discussed on last quarter's call, which included 12 of our hospitals achieving a leapfrog A grade and approximately 70 percent achieving leapfrog A or B grades. proud of the recognition coming in from other noteworthy sources. For example, earlier this month, our Lutheran Hospital in Fort Wayne, Indiana was awarded the American College of Cardiology's Heart Care Center National Distinction of Excellence, the only hospital in the state and one of only 100 hospitals across the country to receive this designation. Also, several of our hospitals were recognized by CMS for achieving zero hospital-acquired infections, some of the nation's best performance in this area. And many others received recognition and designations reflecting the quality care we provide to our patients. These recognitions underscore the significant progress our clinical teams have driven across multiple measures of safety and quality over the past few years, including record achievement in risk-adjusted mortality index, sepsis mortality, and hospital-acquired infection rates. We are seeing positive movement in patient experience surveys and in the areas of employee satisfaction and physician experience. The record response rates to our recently completed employee survey shows that we have a very engaged employee base, even as we recognize that we have significant work still to be done. Our ability to continue advancing in each of these will drive enhanced financial performance over time and long-term value creation for our organization and our shareholders. Turning to our operating performance for the second quarter of 2026, adjusted EBITDA was $330 million, compared with $380 million in the prior year period, on a 9.8% decline in net revenue, primarily reflecting a smaller prior period benefit from newly approved state directives. directed payment programs, as well as divestitures completed over the past 12 months. Results for the quarter include the benefits from recently approved Medicaid state directed payment programs in Indiana and Florida, which were offset by a prior period adjustment to the Arizona state directed payment program. And an unexpected increase in uninsured volumes and continued softness in demand for elective surgical procedures among commercially insured patients, which we attribute to continued consumer insecurity related to geopolitical instability and inflationary pressures. Same store net revenue increased 2.4% over the prior year period. Same-store adjusted admissions increased 2.9%. However, approximately half of that volume growth was driven by uninsured visits with minimal related net revenue. This factor, together with a lower surgical versus medical mix, was more than enough to offset the rate gains from the new state-directed payment programs, resulting in a 0.5 percent decline in net revenue per adjusted admission for the quarter. We continue to believe that the non-ACA related payer mix and service mix challenges that we experienced in the first half reflected temporary disruption in demand for healthcare services in our markets. And in fact, we were encouraged by the improving volume and surgical trends we witnessed exiting the quarter. However, as we consider deteriorating consumer confidence in the markets we serve, economic impacts from escalating hostilities in the Middle East, along with the softer surgeries and unfavorable pair mix we experienced this year to date, we believe it is prudent to be more cautious about the second half of the year and therefore adjust adjusted our full year outlook accordingly. Before handing it over, I want to reiterate how proud I am of the progress we are making as an organization and the focus on our top priorities, which we believe will help us navigate a dynamic operating environment and emerge positioned for long-term success and improved financial results. At this point, I'll turn the call over to our Chief Financial Officer, Jason Johnson, to review financial results and other information in greater detail. Jason. Thank you.

Thank you, Kevin, and good morning, everyone. For the second quarter of 2026, financial results came in below our internal expectations. The company continued to execute well on the controllable aspects of our business, including strong cost controls, demonstrated further progress on our top priorities, and saw sequential improvement in overall volume trends. However, service and payer mix did not improve as expected, reflecting continued softness in elective procedures, along with higher uncompensated care, both of which showed lower margins. Adjusted EBITDA for the second quarter was $330 million, with a margin of 11.7% versus 12.1% in the prior year period. Results include approximately 40 to 45 million in combined EBITDA contribution from the recently approved Florida and Indiana state directed payment programs that were not in our previous guidance. of this amount approximately 20 to 25 million related to prior periods. However, a portion of this was offset by an approximate $15 million reduction in the Arizona State-directed program because of a prior period true-up. Same store net revenue for the second quarter increased 2.4% year-over-year. Same-store inpatient admissions increased 1.9% and adjusted admissions increased 2.9%. Meanwhile, same-store net revenue per adjusted emission declined to 0.5% as the rate benefit from new state directed payment programs was more than offset by unfavorable shifts in payer mix and service mix. As Kevin previously noted, approximately half of the growth in adjusted admissions during the second quarter was from uninsured patients. And similar to other operators, we experienced continued self-demand in commercial elective procedures. Same-source surgeries declined 0.1%, with a notable decline of 3.8% in inpatient surgeries. On the call side, we performed well with a 0.3% increase in same store operating expense per adjusted emission. Labor cost was well managed once again with same store average hourly rate up approximately 1.1% year over year on a same store basis. And same store contract labor spend down 5.6%. However, salaries and benefits expenses, the percentage of net revenue, increase 100 basis points year-over-year on a same-store basis due primarily to increased physician employment. Supplies expense was well controlled, declining 70 basis points year over year to 14.2% of net revenue on the same store basis, reflecting both the decline in elective surgical volumes and continued improved procurement under our ERP. Medical specialist fees, meanwhile, increased approximately 19% year over year on the same store basis and represented 5.6% of net revenue, which was up from 4.8% in the prior year period and outpaced our forecast for 5 to 8% growth. Anesthesiology and radiology continue to be the largest pain points in this regard. The increase in anesthesia specialties is primarily due to higher salary subsidies from lower net revenues resulting from fewer surgeries. The increase in radiology feeds is primarily due to an increase in imaging volumes. Cash flows from operations were $87 million for the second quarter, or $143 million when adjusted to exclude cash taxes paid out of divestiture proceeds, improving significantly from the use of $297 million in the first quarter. Several of the items that affected the first quarter cash performance improved or reversed as expected, including improved Medicaid state-directed payment cash flows, less interest paid, and no annual performance bonus payments in the second quarter. In May, we completed a tender offer using proceeds from recent investors to repurchase approximately $368 million of the 4.75% Senior Secured Notes due 2031 and $231 million of the 10.875% Senior Secured Notes due 2031. The company's leverage at quarter end was 6.7 times versus 6.6 times at year end 2025. At quarter end, we had no amounts drawn on our ADLs, and our next significant maturity is in 2029. During the quarter, we completed the previously announced divestiture of four hospitals in Arkansas for $110 million in cash and also completed the previously announced acquisitions of majority ownership percentages in Surgical Institute of Alabama in Birmingham and South Anchorage Surgery Center in Anchorage, Alaska. These acquisitions are strengthening our positions in core markets and are meeting our expectations for operating and financial performance thus far. We will continue to evaluate opportunities for growth investments across each of our core markets. As noted in last night's press release, we are updating our financial guidance for 2026. Specifically, we now expect net revenue to be $11.4 to $11.6 billion and adjusted EBITDA in a range of $1.3 to $1.375 billion. Next slide. The revised ranges reflect several puts and takes, most notably the full year's benefits from new Medicaid state directed payment programs in Georgia, Indiana, and Florida, which are more than offset by increased headwinds from macroeconomic factors and disenrollment from Affordable Care Act plans. On this second point, when we set initial guidance for 2026 in February, we had to make certain assumptions regarding member disenrollment rates, plan switching, and overall patient behavior due to the loss of enhanced premium tax credits. For the first half of the year, the impact to net revenue has tracked in line with our previous expectations. However, based on experience to date, we've updated our estimate of how many of these disenrolled patients are continuing to come to our hospitals, which is driving higher costs to provide care with minimal related net revenue. With our revised guidance, we're assuming a similar impact in the second half, along with continued softness in elective surgery volumes, resulting in lower midpoint for adjusted edema. This concludes our prepared remarks, so at this time we will return the call back over to the operator for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, Please press star, then 2. Please limit yourselves to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ben Hendrix with RBC Capital Markets. Please go ahead.

Hi, this is Michael Marion for Ben. Thanks for taking my question. I believe you mentioned a $20 million headwind related to the EPTC expiry in the quarter and guidance contemplates a similar run rate for the remainder of the year. What gives you confidence that the EPTC headwind doesn't worsen through the balance of the year, given that 4Q is typically your highest margin quarter, and we're seeing a higher mix of bronze plan selections with very high deductibles.

Yes, this is Jason. I'll start and then Kevin can jump in. So, for the full year, just to clarify for everyone, we had initially estimated that the net revenue impact from HICS disrollment would be between 90 and 110 million and the between 20 and 30. Coming out of the first quarter, both of those assumptions, we were, the experience was right in line with those assumptions. And then in the second quarter we saw a more significant decline in our HICS volumes and obviously a correlation with our increase in cell So we estimate the quarter impact on the EBITDA front to be 20 million negative in the quarter and about 25 million for the first quarter, so 25 million for the first half of the year. We do think the back half of the year looks like the second quarter, so at the midpoint around 20 million-ish. The volume declines are consistent with what we expected in HICS and the revenue is still in our range. We're assuming that a majority of the volume decline in HICS is also resulting in an increase in sale pay. So I feel comfortable with our increased range, which now sits between 50 and 75 million of impact on an annual basis. And I think the, That's pure self-pay. So I think that people who have maybe meddled down or teared down are behaving more like any other... person that has commercial plans that have a higher deductible and I think their behavior will mirror more that group.

Our next question comes from Brian Tinkulett from Jefferies. Please go ahead.

Hey, good morning guys. Thanks for taking the question. Maybe Jason, as I think about the guidance that you gave, given what we've seen in the first half of the year, can you help me bridge to that guide as we think through the back half of the year and anything you'd call out in terms of moving pieces that we need to figure or factor into our models for Q3 and Q4 separately? Thank you.

Thank you. Yes, thanks for the question, Brian. I'll start. So, if you talk about from the midpoint of our initial annual guidance in February was $1,415,000. the MIF in the first half of the year versus the expectations when we developed that guidance is between 60 and 65 million, so we reduced the annual guidance by that amount. And we assume a similar impact in the second half of the year, so we took the second half down by 60 to 70 million and both those reductions are inclusive of the the higher estimated HICS impact that I just mentioned of 50 to 75. And then on the benefit side, we layered in the half of the year DPP benefits that we expect from the the plans in states that were not approved when we set our initial guidance, that weren't factored in. That's Georgia. Indiana and Florida and for Florida just to unpack that a bit the amount that we recognized for Florida in the second quarter, uh, was 20 to $25 million. And that related to, um, the period from October 24 through September 25. We did not continue to accrue at that higher rate for the plan year 2026, which runs from I'm sorry, October 25 through September 26, because the plan hasn't been submitted to CMS yet and there's some changes in the waivers from what was previously approved. So we think it's prudent to kind of wait to see what's ultimately submitted to CMS and how quickly CMS takes to review and ultimately approve the plan. However, we did factor in the possibilities for the Florida 26 into our guidance. At the low end of our guidance, we assume that the 26 year is not able to be recognized by year end. At the high end, assume that we are able to recognize the Florida 2026 and the benefit is you know consistent with.

amount that we just recognized in the second quarter. Understand. And then maybe, Kevin, as I think about the guidance cut, I mean, I understand the payer mix headwind here, but when I think about the free cash flow or the operating cash flow adjustment that you made, it looks to be a little bigger. So just curious how you're thinking about the drivers of that and what you're able to do. I know some of that's AR related. So just curious if you can share with us, you know, some of the challenges you're facing on the cashflow side, that's making it look worse than the payer mix headwind that you called out in the email line. Thanks. Sure.

Thank you, Brian. One of the challenges that we're experiencing on the cash flow side is really the slowdown payments by the payers, not only just slowing down in the normal course, but they're now auditing more claims before they pay them. and having additional record requests. Oftentimes in the past those things occurred after payment And then if there was a problem, you know, there would be some true-up later, but now of behavior of the payers as such that they're doing those down the payment process. So, our AR is growing accordingly. That would, you know, assuming that continues forward, it's, you know, it's going to be We ultimately get the cash, but it's kind of a one-time slowdown in payment, so our AR days are growing. Some of the payers even talked publicly about, you know, increasing their days in AP. So we're on the other side of that equation with increasing days. So that said, we don't believe it's, necessarily a collection issue, it's just a timing issue. And once we anniversary that, then we're back on a normal run rate.

Our next question comes from AJ Rice with UBS. Please go ahead.

Hi, everybody. Just maybe to drill down on what you're seeing in the surgical volumes a little bit more, I know you called out a couple of service lines. Would you say that the surgeries that you're seeing the softness in are surgeries that traditionally are viewed as more elective and postponable procedures? Is that what you're seeing? break it down between is this a phenomenon of what you're seeing around the public exchanges or is it broader than that? And then also another element of it is, I know you have standalone ASCs versus your hospital surgery, inpatient, outpatient. Is there any distinction between what you're seeing in the freestanding surgery centers with what you're seeing in the hospital-based surgeries?.

So, thanks AJ. This is Kevin. I'll start on this one. So definitely the procedural softness and service line softness is trending towards more elective procedures. Orthopedics being the largest decline, so your hip and knee and shoulder replacements, Those are typically procedures that people can delay or at least defer for periods of time you know, get a cortisone shot, maybe continue to try to manage the pain, and manage through some rehab, at least for a period of time. We're also seeing some softness in cardiac surgeries and intuitively those seem less elective, but they really are more elective, and as people defer to the government, visits to their cardiologist and defer some of their screenings, oftentimes those procedures also get deferred. We saw that during COVID when, you know, there was a significant decline, again, not intuitive, but there's a significant decline in cardiac procedures during COVID. that were hard to explain, but we're seeing some of that as well. On the inpatient, outpatient, we're seeing bigger declines in the inpatient side. but we are, you know, and overall we saw some increase in outpatient surgery, so our, surgery centers are picking up, but it is kind of lower acuity surgeries and not the orthopedic and some of the cardiac procedures that you would normally have expected. We are seeing really good increases in clinic visits and in the number of patients that in things like orthopedic MRIs. So those continue to outpace prior year at a pretty significant rate, which would suggest we're capturing the patient. They probably still need the procedures, but those visits and screenings are not not translating into surgeries which lend us to continue to believe or support our belief that it's more of an economic decision that people are delaying the follow-on procedures.

Okay. Then a follow-up, maybe just ask about your uncompensated care. I know you gave the percentage of uncompensated care as a percent of revenue up significantly year to year. I wondered if you have any color on the percent of your admissions that are uninsured this year versus last year?.

I was wondering, did it step up significantly from Q1 to Q2? Sure, so we were approximately five years ahead 5% of our visits, just shy of 5% of our visits prior year. were uncompensated or self-pay patients. And this year we're about 110 basis points higher, just over 6% of visits. So, roughly a 20% increase or so in.

in self-pay visits. And was that different than first quarter materially, or was first quarter sort of similar to second quarter?.

The second quarter was greater than first quarter. We did not see that big of an increase in the first quarter.

Okay, interesting. All right, thanks a lot. Our next question comes from Jason Casorla with Guggenheim. Please go ahead.

Great. Thanks for taking my question. Maybe can you just walk through some of the mechanisms on the medical specialist fees? You've done a lot of work there to in-source to help offset industry-wide pressures, but it does seem like these costs will pressure you regardless of volume trends are favorable or unfavorable to your enterprise. So I guess just like any updated thoughts on the medical specialist feedback drop, like if you can revisit some of those subsidies, if volumes remain pressured or anything else to help offset the growth there would be helpful. Thanks.

Yes, so the most significant component of that is anesthesia. That does have the income guarantee. when volumes are down, surgical volumes in particular, and anesthesiologists are not, collecting or generating as much revenue since they're guaranteed the minimums in the contract and we have to pay the subsidies. That one is definitely volume based to some extent and that's where we are seeing the significant of increase. And I would say that we are doing several things and we're In fact, we have in-sourced certain anesthesiologists and a few other specialties in certain locations. And in some of those cases when we insource, that may mean that we're not just employing some of the docs but we're also contracting with some on a 1099 basis. and when that happens we end up with, we get the professional fee in revenue, but the payment to the docs for providing the services still goes through medical specialties. And so that impact is, about three million of that revenue in the quarter versus the prior year and about six million year to date. So there's a little bit of offset grossed up in revenue but it's still outpacing what I had expected. Kevin, do you have any more flavor? No, I think you covered that.