Community Health Systems Inc Q4 FY2023 Earnings Call

Hello, and welcome to the Community Health Systems Fourth Quarter and Full Year 2023 Earnings Conference Call. I would now like to hand the call to Anton Hie, Vice President of Investor Relations. Please go ahead.

Thank you, MJ. Good morning, and welcome to the Community Health Systems Fourth Quarter and Year-End 2023 Conference Call. Joining me today on this call are Tim Hingtgen, Chief Executive Officer; Kevin Hammons, President and Chief Financial Officer; and Dr. Miguel Benet, Executive Vice President of Clinical Operations. Before we begin, I must 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 to our website. All calculations we will discuss exclude gain or loss from early extinguishment of debt, impairment expense as well as gains or losses on sales of subsidiaries gained from the Core Trust transaction, expense from government and other legal matters and related costs, expenses from business transformation costs, expenses related to employee termination benefits and other restructuring charges, and changes in estimates for professional claims liability related to the operational locations. With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.

Thank you, Anton. Good morning. Thank you for joining our fourth quarter and year-end conference call. To kick things off, I first want to recognize the more than 60,000 dedicated employees, providers and leaders across our healthcare systems for the excellent care delivered to patients in 2023 and always. I'd also like to acknowledge the tremendous team effort that enabled progress in every key priority established for 2023, which we have reviewed on these calls over the past several quarters. Throughout the year, we were purposely focused on advancing safe quality health care, strengthening our workforce, accelerating growth and controlling expenses. Major accomplishments in the year included volume gains across all key services as we continue to see broad-based strength in demand. New access points, strong capacity management, defined workforce initiatives and investments to optimize our competitive position make this growth possible. Same-store admissions increased 3.5% in 2023 and adjusted admissions were up 5.3%, driving same-store net revenue growth of 4.8%. Same-store ER volume grew 1.1%, while surgeries increased a solid 5.1%. Adjusted EBITDA for the full year increased 12.3%, and our margin expanded 100 basis points year-over-year when excluding the positive impact of pandemic relief funds in 2022. When you consider a more than $200 million unanticipated increase in medical specialist fees and medical malpractice expense with a 150 basis point impact to margin, we view this performance as a clear sign of positive momentum. We continue to invest in our core markets to accelerate growth prospects and further capture market share. In Knoxville, Tennessee, construction of our new tower is nearly complete with the grand opening scheduled to take place in the next few months. This project includes new inpatient beds and an expanded emergency department. On the Alabama Coast, the major expansion of our Baldwin County campus should open before the end of the year and will also increase the number of acute care beds and the surgical capacity available within this very busy hospital. While we pursue bed additions where we are seeing strong demand and our growing market share, we also continue to invest in outpatient access points, such as ambulatory surgery centers, freestanding emergency departments, urgent care centers and provider clinics. As a result, CHS health systems are capturing patient care that is migrating out of the inpatient environment with 54% of our net revenues now derived from outpatient care. This outpatient focus includes the deliberate broadening of our ASC footprint. During the fourth quarter, we completed the expansion of the Grand View GI ASC in Birmingham, Alabama, and completed an ASC acquisition in La Porte, Indiana. And already this year, we opened a de novo ASC in Cedar Park, Texas. In addition to capital investments in our health systems, our transfer center is driving volume and higher acuity admissions, most notably in cardiology, critical care, GI and general surgery. The transfer center also gives us visibility to see where we have opportunities to invest in further service line development and physician recruitment. Work to sharpen our portfolio in 2023 included divestitures in West Virginia, Arkansas, Oklahoma and Florida. As you may have seen, the FTC recently sued to block our planned divestiture of 2 hospitals in North Carolina to Novant Health. We are limited in what we can say at this point, but we believe this divestiture is appropriate and in the best interest of the community. The case will now move to Federal Court for final determination. Proceeds from divestiture transactions enable a variety of positive activities such as targeted investments in core markets, funding potential future acquisitions and increased flexibility in debt management. We are currently evaluating inbound interest for a handful of markets that could yield more than $1 billion in additional proceeds. We have modeled several attractive scenarios but will remain extremely disciplined in our decision-making as it relates to divestitures, acquisitions and ensuring that our core portfolio is strong and positioned for long-term success. In an effort to strengthen our workforce in 2023, our centralized clinical recruitment team continued to deliver strong results, and we finished the year with a net gain of more than 1,000 bedside nurses. We also expanded their activities to Allied Health, building 1,500 physicians in clinical support, technician and other roles. The impact was real, with the $260 million reduction in contract labor in 2023 compared to the prior year. Also, as you know, in 2023, we've rapidly and successfully insourced a large number of hospitalist and emergency medicine programs that were previously vendor outsourced. As a result, we now operate an internal infrastructure of resources that allows for further integration of hospital-based physician groups required by our markets. Based upon the success of insourcing ED and hospitalist medicine initiatives are underway to insource anesthesia services in select markets, and we believe we can scale these new capabilities effectively as needed. Advancing safety and quality is an ongoing daily commitment. In 2023, we achieved a record 89% reduction in our serious safety event rate from the baseline established more than a decade ago. We saw many other measures of quality care success including a 25% reduction in the overall mortality rate and a 48% improvement in postop respiratory failure rates. Looking to the future, our recently announced clinical data platform migration and partnership with Google Cloud opens the door for expanded use of AI and demonstrates how CHS is leveraging technology to drive administrative efficiencies and improve patient care. Dr. Benet is on the call with us today to comment about the ways we are and will be using AI and machine learning across our hospitals. Dr. Benet?

Thank you, Tim. Our partnership with Google Cloud enabled us to unify our data into a single platform that facilitates greater transparency, enables more real-time decision-making and serves as the foundation for the future use of AI in our health care settings. We call our platform THIA, or Tactical Health Engine for Intelligent Analytics. Working on this platform, we are developing tools that improve patient care and outcomes and support our clinicians and administrative teams in their work. As we leverage AI, we expect to drive efficiencies that enable our health care professionals to focus even more of their time on high-value patient interactions. For example, we can deploy this technology for continuous monitoring of patients in the acute care setting using algorithms and near real-time data to identify the potential need for early intervention. AI can be used to generate clinical summaries that physicians and nurses can edit for documentation, decreasing administrative work. Since AI can analyze and disseminate large amounts of complex data, we anticipate using it to help our clinical documentation specialists capture the complexity of care and documentation. Another example is our ability to provide patients with concise contextualized information to improve social determinants to help by using Google Maps capabilities to provide discharged patients with a list of nearby resources available in their communities customized to their needs. We are already seeing notable benefits, including improvements in various quality metrics and operational benchmarks such as reductions in mental state. There are endless possibilities, and we are just beginning to see the power of artificial intelligence and health care. In all that we are doing at CHS, we are following standards set in 2018 for ethical, safe and proper use of AI and have joined the Coalition for Health AI to help frame safe and responsible use of AI in health care into the future. Tim, I'll turn the call back to you.

Thank you, Dr. Benet. Our fourth overarching priority remains controlling expenses, which Kevin will address in his remarks, along with other comments about our financial performance in the fourth quarter and 2023 and our outlook for 2024. Kevin?

Thank you, Tim, and good morning, everyone. Overall, we were pleased to see continued solid demand in our markets and CHS' ongoing progress on our strategic priorities. For the fourth quarter, net operating revenues were $3.2 billion, representing year-over-year growth of 1.2% on a consolidated basis. On a same-store basis, net revenue was up 4.1% over the fourth quarter of 2022, driven primarily by a 3.6% increase in adjusted admissions and a 0.5% growth in net revenue per adjusted admission. Inpatient and outpatient volumes in the fourth quarter increased for both the commercial and Medicare books, reflecting the strong demand in our markets and targeted capital investments. However, the mix of that business with the disproportionate growth in Medicare Advantage versus fee-for-service and from states where our negotiated commercial rates are lower continued to affect our net revenue per adjusted admission growth, similar to previous quarters. Adjusted EBITDA for the fourth quarter was $386 million, representing a margin of 12.1%. During the quarter, we benefited from the recognition of approximately $40 million in increased EBITDA from the Mississippi Hospital Access Program, of which approximately half related to prior periods. While this amount was not factored into our guidance, we effectively offset this benefit by increasing our self-insurance reserves for medical malpractice, which was recognized as a change in estimate during the fourth quarter. We believe this adjustment was appropriate based on recent experience and claims activity across the hospital industry. Overall, we were pleased with our performance on labor costs. The average hourly wage rate for the quarter was up approximately 3% year-over-year, bringing the full year increase to approximately 4% versus our full year expectation for 5%. We expect similar growth in average hourly rate in 2024 of approximately 4%. As Tim noted, our recruitment retention strategies have helped stabilize our workforce, allowing us to drive significant reductions in contract labor expense, which at $52 million represented an approximate $30 million decline over the prior year and a modest decline sequentially. Recall that we typically see a material increase in contract labor utilization in the fourth quarter to help cover for seasonally higher patient demand. Meanwhile, medical specialist fees at approximately 5% of net revenue remained elevated versus historical levels but generally consistent with the third quarter. When comparing the gross up of expenses for physicians in-sourced, from the former APP contract against the net revenue related to those physicians, we estimate that our results benefited by approximately $5 million during the quarter versus the subsidy payments previously paid to APP. We expect further opportunities in the coming quarters as we look to scale our in-sourcing efforts, but believe there continues to be pressure, particularly in the area of anesthesia. Cash flows from operations were $90 million for the fourth quarter of 2023 compared with $9 million in the year-ago period. We did not see the expected improvement sequentially in accounts receivable, primarily from the temporary billing delays that we discussed last quarter related to clinical system upgrades and our physician in-sourcing initiative. Additionally, performance for the quarter was affected by growth in the Mississippi Supplemental Medicaid program, AR of approximately $40 million. The slowdown of receiving payments from Medicare Advantage payers versus fee-for-service of approximately $10 million and the acceleration of interest payments resulting from our refinancing efforts of approximately $30 million. Note that we've begun receiving payments in the first quarter from the state of Mississippi for the expanded Medicaid funding program and expect significant further improvement in cash flows relative to where we finished 2023. Capital expenditures for the quarter were $110 million, bringing the full year total to $467 million, consistent with our guidance of $450 million to $500 million. In December, we completed a private offering of $1 billion of 10.78% senior secured notes due 2032. Using proceeds from the offering, and from the completion of our Bravera divestiture, to redeem $985 million of our 8% notes due 2026 and to extinguish $402 million of principal amount of other debt, which by capturing discount resulted in a pretax gain from early extinguishment of debt of approximately $72 million during the quarter. Net debt to trailing adjusted EBITDA at year-end was 7.88x slightly improved relative to the third quarter. We remain well positioned to meet our needs going forward with improved operations, and $637 million of borrowing capacity under our ABL. As Tim noted in his remarks, apart from the North Carolina transaction, we are currently evaluating opportunities for further divestitures across a handful of markets that could total more than $1 billion in additional proceeds. We anticipate that 1 or more of these transactions could close within the calendar year, providing substantial capital for the company to redeploy. Project Empower, our enterprise modernization initiative launched October 1. After standing up our shared services platform and new workflows at 15 of our facilities with no disruption in patient care, we are seeing improved visibility and insight as expected. After a pause during the year-end closing process, we will begin further implementations throughout 2024. Moving on to our initial guidance for 2024. We anticipate net revenue of $12.3 billion to $12.7 billion, adjusted EBITDA of $1.475 billion to $1.625 billion and cash flow from operations of $500 million to $650 million. When normalizing for the divestitures completed in 2023, the midpoint of our net revenue outlook represents a year-over-year growth of approximately 4% and the midpoint of adjusted EBITDA represents a growth of approximately 9%. Note that our outlook does not include the impact of any future divestitures or major acquisitions, nor does it include the impact of any debt refinancing transactions and excludes the potential benefit from a rollback of the 163(j) limitation on interest deductibility for tax purposes and the income tax refund that we have previously discussed. Additionally, our cash flow guidance includes approximately $60 million to $80 million of cash outflow related to Project Empower. As the ERP and workflow modernization rolls out to the markets throughout 2024, these investments will wind down by year-end and will become a cash flow tailwind into 2025. To provide context for the 2024 adjusted EBITDA guidance relative to 2023 and 2022, there are several puts and takes that we would like to highlight. Specifically, as we set initial guidance this time last year for 2023, we had anticipated adjusted EBITDA growth of approximately 7% at the midpoint. At that time, the primary expected headwinds were the $173 million reduction in pandemic relief funds and a moderate increase in medical specialist fees, which we were able to offset through the benefits of our margin improvement program, contract labor reductions and growth in patient volumes. What we had not anticipated as we started 2023 was that medical specialist fees would spike as high as they did midyear prior to our APP transaction and that we would face additional headwinds from higher medical malpractice expense and from the outsized growth in Medicare Advantage, as we have discussed in quarterly calls since then, leading to the results you see today. Looking into 2024, we have much better visibility into these factors, while at the same time, we anticipate tailwinds from growth capital projects over the past 2 years, further reductions in contract labor, additional savings from cost control efforts and a full year's benefit from the recently expanded Mississippi Medicaid funding program. Based on these factors as well as operating results through the first 6 weeks of the year, we have a high degree of confidence in our ability to deliver on the guidance we have provided and look forward to providing updates in the coming quarters. Tim?

Thank you, Kevin. I think now we're ready to open up for Q&A.

Today's first question comes from Brian Tanquilut with Jefferies.

Kevin, thanks for all the color that you gave us on the cash flow. But maybe just a little more detail, just looking at the cash flow shortfall in Q4 and how you're thinking about guidance in 2024, including what seems to be a reduced CapEx spend for the year. So just any color you can share with us and yes, that would be great?

Sure, thank you for the question, Brian. To address the items that contributed to the shortfall in Q4 and provide some insight into 2024, we finished Q3 with an accounts receivable balance of approximately $2.16 billion. We anticipated a decrease in Q4, especially as we worked to recover some of the accumulated accounts receivable from our Cerner conversions. However, while we managed to recover about one-third of that amount, we fell short of our expectations. We experienced additional growth in accounts receivable, particularly concerning some insourced physicians and the timing of commercial payments. The holidays occurring on a weekday during the last week of December left us without a clear understanding of how commercial payers would process payments by year-end. We view this as a timing issue. Additionally, the Mississippi program contributed to a delay in cash payment until December, further adding to our accounts receivable. Consequently, instead of decreasing, our accounts receivable balance rose, resulting in approximately $130 million in cash flow headwinds for the fourth quarter. Furthermore, we executed a refinancing in Q4, requiring us to accelerate bond repayments and some interest payments that were initially scheduled for 2024. This also reflects a timing issue, as we have made the interest payments now and will not incur them again in 2024. We also settled a legal case, the Mason case, for about $30 million in Q4, a payment we had not anticipated in terms of timing, although it was accrued by the end of the quarter. These factors mainly stem from timing-related issues. Looking ahead to 2024, I want to mention the 163J interest deductibility, which has passed the House and is awaiting action in the Senate, although we do not know when or if it will pass. Therefore, we have not included this in our guidance. Similarly, regarding the tax refund, we remain confident we will receive it, but my prior predictions regarding its timing last year were incorrect, so I won't be making predictions on government approval this year. If either of these issues are resolved positively, they would benefit us. Our current cash tax estimate is between $150 million to $200 million, and this could decrease if either of those conditions materialize.

Got it. Okay. As I think about the expense line, can you share your views on nurse wage inflation, contract labor utilization, what's included in the guidance, and also spending on physician services or physician specialists, both in-house and outsourced?

We are anticipating a wage inflation rate of 4% for 2024, which is similar to what we experienced in 2023. We have factored in a conservative estimate for wage inflation and will strive to keep it below that, aiming for an exit rate of around 3.4% in the fourth quarter. Regarding contract labor, our current guidance reflects the exit run rate from 2023, which was around $52 million in contract labor expenses for the fourth quarter. If this continues throughout 2024, we would see a reduction of approximately $60 million in contract labor year-over-year, with about half of that impacting EBITDA. There is potential to reduce contract labor further, as it remains higher than pre-pandemic levels. Additionally, concerning capital expenditures, we have seen increased CapEx in recent years due to significant projects now concluding, such as inpatient towers aimed at expanding capacity in growing markets where we are currently full. As these projects wrap up, we anticipate lower expenditures, which also take into account the hospitals we have divested over the past year. We are comfortable with our capital spending and are focused on managing our free cash flow.

Yes. And Kevin, I'll tack on to that in terms of our philosophy and the management of our capital spending. We have a really full pipeline. We've talked about that a lot over the last several quarters. The predominant amount of that is on the outpatient side of the business, which we know does not typically have as high of a spend to get those strategic access points put into operation. So that outpatient focus continues to be an area of growth and opportunity for us across the portfolio. We're also managing that pipeline relative to the gains in staffing so that when we are ready to activate the capital, bring it online, we have a cost-effective way to drive margin and payback on that capital investment. So we're really, I think, hyper focused on phasing this in ways that are really going to be accretive to earnings in the long run. The other thing I would point out is outside of CapEx, it's just keeping some of our powder dry for opportunistic acquisitions. So we'll keep an eye on that as things emerge in the upcoming quarters. On the outpatient side of the business, you heard me reference 2 outpatient ASC acquisitions later last year. We continue to scan our markets for those types of opportunities as well.

The next question comes from Jason Cassorla with Citi.

Great. Can you guys hear me?

Jason, I think we may have lost you.

The next question comes from Ben Hendrix with RBC Capital Markets.

I wanted to follow up on the Med Mal reserving, specifically your decision not to adjust that out of adjusted results. Also, could you share your general comfort level with the reserves where they are now? Is there anything on the horizon that could push those reserves higher throughout the year? Any comments on your thinking around this would be appreciated.

Sure. Thanks for the question, Ben. We debated whether or not it was appropriate to adjust that out of our adjusted EBITDA and certainly give that some consideration. At the end of the day, we decided to leave it in. We also had with Mississippi coming in, which was unexpected in the fourth quarter, we did not want to appear that we were cherry-picking and only adjusting out unfavorable items. There's reasons that Mississippi would stay in because it's an ongoing program, and we did not want to create a situation where we pulled it out also in the fourth quarter and then put it back in next year in just some inconsistencies. So at the end of the day, we just decided to leave them both in the adjusted EBITDA calculation. Again, the Mississippi program like other programs are ongoing and really represent reimbursement for services provided. So I think that's also appropriate. As we look ahead to '24, the malpractice environment overall, I think, is getting more difficult. We're seeing some pretty large settlements, jury awards in cases that are higher than we've ever seen historically. I think there is a little bit of pressure in the industry at large. We're hearing that from our insurance carriers as well. We are self-insured for malpractice with excess insurance coverage above certain levels. But so we do have insurance. And here, there is some pressure there. But overall, I would expect our malpractice expense to probably come back to something a little more normal in the future as we manage through. I'd also point out that the work we've done on patient safety and quality over the years and the 89% reduction in serious safety events that Tim called out is very meaningful. And there's such a long tail on malpractice. We're still settling a lot of old claims, but the rate at which new claims are coming in is significantly lower than it had been historically. So I feel good about the future in our ability to manage that cost.

And if I may, a quick follow-up on your comments about around puts and takes on guidance. I was wondering if we could get some more detail on the kind of the key drivers of margin improvement implied for 2024. It sounds like there will be some support from lower contract labor year-over-year, and you mentioned lower wage inflation than we saw also Mississippi Medicaid, but should we also expect some normalization of payer mix trends this year? Any comments on how we bridge to the margin?

Yes, you've highlighted a few points I've already addressed. I believe we can anticipate some normalization in payer mix trends. Currently, the rates remain relatively favorable. The governmental rate for Medicare is expected to increase between 2.5% and 3% this year, compared to 1.9% in 2023. Medicaid appears to be stable, aside from certain supplemental programs, which were a negative factor in 2023. These elements are slightly beneficial as commercial rates continue to hover around 4% to 6%, similar to last year. Another year of these conditions should be advantageous for us as we grow our volume and manage to cover our fixed costs, thus improving our margins. The growth in our markets and a resurgence in volume are crucial factors to note. Additionally, we are focused on our margin improvement program, which involves a disciplined approach to various initiatives. Some of these initiatives are included in our guidance, while others present upside potential that we didn't want to fully incorporate without understanding the uncertainty of their timing and impact. Overall, we have several initiatives underway that should lead to favorable outcomes.

The next question is from Jason Cassorla with Citi.

Great. Can you guys hear me?

Sure can. We hear you now, Jason.

The next question comes from A.J. Rice with UBS.

Just maybe to follow up a little bit more on that payer mix question. There's been obviously a debate in the marketplace about utilization rates. Are you seeing any difference in behavior among your utilization between your MA book and your fee-for-service book and frankly the rest of the book as well? Is there anything you can tell in terms of rebound post pandemic and so forth that may show different trends across those payer classes?

I think kind of post-pandemic, we certainly saw a deterioration in the actions by the MA payers where they were not downgrading or denying claims during the pandemic, but they certainly began denying and downgrading significantly more claims, particularly in the MA book, although it applies to commercial as well, but more so in the MA space. And we believe that kind of hit a peak. And I think it's gotten a lot more attention at the governmental levels. We've certainly been active in our discussions with legislators, with our lobbying efforts. I know the American Hospital Association, Federation American hospitals, they've all tried to shine a light on some of the behavior of the payers. And I think that's resulted in some movement by CMS to come out with some additional guidance around their expectations, like the 2 midnight rule like some of the preauthorization requirements. We have yet to see any real change that's meaningful or measurable. But having said that, we do expect there to be some favorable movement into 2024.

Yes, A.J., this is Tim. I'll go back to my comment. The reason we set up the physician adviser program was to make sure that we're supporting the admitting physician's decisions with more collaboration with the MA plans or commercial plans in general. We have a strong compliance program across Medicare and every other payer source as well. But in general, to try to counteract some of those adverse trends, we believe we're better positioned going forward to make sure that that admitting physician's decision is more strongly represented.

Okay. For my follow-up, I wanted to ask about the divestiture activity you mentioned. Is this a response to proactive outreach from others, or is it a strategic choice you're making? You talked about having $1 billion available for capital deployment. Are you mainly considering using that to pay down debt, or do you have other potential uses for that capital in mind?

Sure, I'd be happy to address that. The inbound interest we've received is primarily driving this. However, I believe it's important to emphasize that we're carefully assessing these opportunities. We receive interest for various locations and facilities, but we don't act on every proposal. That said, we do have some interest in markets that seem strategically viable for transactions, and we're exploring those options further. At this point, we can't say whether they will materialize, but there is considerable interest that we're actively discussing and evaluating. If we receive proceeds, we will consider the market conditions and other opportunities to determine the best approach for reducing our debt. My main priority is to lower our leverage and optimize our capital structure, which can be achieved in two ways: by reducing debt or increasing EBITDA. If a suitable acquisition opportunity arises while we have cash available and we believe it would be beneficial, we would certainly consider it. Conversely, if the situation suggests that paying down debt is more advantageous, we would pursue that route. I understand this is not a precise answer, but we will assess the best course of action based on when cash is received.

The next question comes from Stephen Baxter with Wells Fargo.

Just another 1 on payer mix. I might have thought that with the growth of the exchanges or maybe potentially some catch-up in the commercial demand that you were hoping to see in 2023 that there could potentially be upside risk to payer mix. It sounds like you're a bit more cautious there. I just want to make sure we really are capturing all the dynamics that you want us to keep in mind. And then just to come back to AR briefly, just to manage our expectations, would we expect to see progress as soon as the first quarter? Like are you actually seeing an improve to date this year? Or should we be thinking about maybe a more gradual progression throughout the balance of the year?

Sure. I want to mention a few things about our payer mix, and Tim can add his thoughts too. In the fourth quarter, we saw growth in both our commercial and Medicare populations, and I want to emphasize that we achieved growth in both areas. However, the Medicare Advantage (MA) business grew faster than the commercial sector in the fourth quarter, and for the entire year, it outperformed commercial three to one. We did see an improvement in the proportional change in the fourth quarter compared to the full year, with MA leading the growth. As we look ahead to 2024, we anticipate some moderation in this trend, but we remain focused on monitoring our payer mix dynamics. Regarding accounts receivable (AR), I believe we will see some early benefits in 2024, especially related to the buildup from the Mississippi supplemental program, which we expect to collect largely in the first quarter. Some of the other buildup will likely be more gradual throughout the year, but I do expect us to improve over the year by recovering the remaining conversion AR and from the slower transition of some commercial payers to MA, which should also moderate as we move through 2024. I expect to see improvements over the course of the year.

Today's last question comes from Josh Raskin with Nephron Research.

This is actually Marco on for Josh. Just looking at the 2024 guidance, was wondering if you could parse out some of the $350 million to $400 million in CapEx for 2024. Is that mainly maintenance CapEx at this point? Or do you have any other notable projects in the pipeline that are coming through this year? And do you have any ability to flex that lower in 2024, if you need to?

Sure. So we have been running approximately 50% maintenance capital, 50% growth capital over the last several years if you go back and look at our CapEx. And I would say proportionately, that's still very similar in 2024 will be split about 50-50. As I mentioned, a couple of the large projects that are high-cost projects, the inpatient having patient towers and adding beds are winding down in 2024. And then with fewer hospitals as we actually sold 8 hospitals in 2023, that lowers some of our maintenance capital as well related to those. Overall, I don't think we are materially decreasing the amount of maintenance or growth capital kind of comparatively. The other thing is we've had some capital related to Project Empower over the last year, the majority of what we'll be spending in 2024 will be more on the expense side is now the systems and so forth for that project are built and the costs going forward are going to be implementation and training and rollout costs. So there's some reduction there as well.

The only thing I would add is, to your question is, could you throttle that back? Anything is certainly possible, but similar to what we did in 2023, we were very deliberate in our investments into the core business with the intention of, as Kevin said earlier, working on projects that will help us certainly drive stronger EBITDA performance, which is a benefit to the long-term value of the company and its shareholders. So a similar equation obviously comes into play in 2024. We have a strong pipeline of projects, as I said previously, a lot of those are on the ambulatory side of the business, not as many high-dollar inpatient investments that we're making in 2024. So I think it just is a normal settling of the capital spend, but we're very, very deliberate in how we're allocating our cash in that regard.

Thank you for the information. I have a follow-up question. You mentioned potential proceeds of about $1 billion from identified divestiture opportunities. Could you elaborate on how this might be realized over time, especially considering the recent scrutiny from the FTC on some of these deals? Additionally, can you share any financial details regarding the revenue or EBITDA contribution from those assets?

Sure. I think it's probably too early to tell or to say much we don't have any agreements signed at this point, but this is inbound interest that we're evaluating. I would say, generally speaking, all of these deals would be in the 10x plus multiple of EBITDA of trailing EBITDA, if they are to come to fruition. Again, we've not made a decision and we've not fully negotiated on any of these deals, but we do have inbound interest that's very reasonable to think that if we decide to move forward, we could get deals done. That said, deals don't move very quickly. As you are well aware, I would expect the earliest something to be completed would be probably midyear and then the potential for others to be completed late in the year or early next year.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Hingtgen for any closing remarks.

Thank you, MJ, and thanks to all of you for joining our call today. We look forward to providing you with updates on our progress throughout 2024 and to demonstrating that our strategies and initiatives are producing positive momentum and results. As always, if you have additional questions, you can reach us at (615) 465-7000. Thanks again, and have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.