Good day, and welcome to the Community Health Systems First Quarter 2024 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Anton Hie, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Chuck. Good morning, everyone, and welcome to Community Health Systems' First Quarter 2024 Conference Call. Joining me on today's call are Tim Hingtgen, Chief Executive Officer; Kevin Hammons, President and Chief Financial Officer; and Dr. Lynn Simon, President Healthcare Innovation and Chief Medical Officer. Before we begin, I must remind everyone that 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 will discuss exclude impairment expense as well as gains or losses on the sale of businesses, expense from government and other legal matters and related costs, expense from business transformation costs and expenses related to employee termination benefits and other restructuring charges. With that said, I'll turn the call over to Tim Hingtgen, Chief Executive Officer.

Thanks, Anton. Good morning, and thank you for joining our first quarter conference call. At CHS, 2024 is off to a good start with solid operating and financial results achieved in the first quarter. Same-store net revenue increased 5.7% compared to the first quarter of 2023. Same-store admissions increased 3.8% and adjusted admissions were up 1.9%. The prior year comp was our most challenging of the year with strong same-store admissions growth of 4.8% and adjusted admissions of 9.4%. So we were very pleased to see continued strong demand. Same-store ED visits increased 3.4% in the quarter, and surgery slightly increased. In the first quarters of both 2023 and 2024, surgical volume was well above the first quarter of 2019, beating our pre-COVID baseline by approximately 10%. Growth, coupled with strong expense management, led to 120 basis points of margin expansion year-over-year. Adjusted EBITDA came in at $378 million, up 12.8% from the prior period on a consolidated basis, with growth in our core portfolio outpacing the impact of prior period divestitures. This first quarter performance puts us very much in line with the guidance provided in February, but our work is not yet done, and our leaders remain focused on the opportunities ahead of us. We continue to make steady progress in each of our near-term priorities, and we are especially pleased with investments that are accelerating growth. We opened our new tower in Knoxville, Tennessee, a few weeks ago, and our Baldwin County, Alabama campus expansion remains on schedule to open by the end of the year to address the strong demand for health care services in that fast-growing market. Investments continue into incremental access points to expand outpatient capacity in multiple markets, which included the opening of two new ASCs during the quarter in our Tucson, Arizona, and Cedar Park, Texas markets. Another high-impact initiative that we've been updating you on is our work to in-source the management of certain hospital-based medical specialties. In a minute, Kevin will share details about how the financial impact from this initiative is tracking to our expectations, but I want to address the clinical and operational improvements we are seeing. We now manage 29 ED and hospitalist programs and across the board, we are realizing better quality metrics, improved throughput, lower premium pay utilization, and greater patient satisfaction. These improvements are consistent with our enterprise goals, and it is gratifying to see so much progress, especially when you consider that we have been self-operating these programs for less than a year. We've expanded our efforts to in-source select anesthesia programs with two sites already in place and additional opportunities expected to come online in the months ahead. We don't often take the opportunity to share our internal programs that are driving alignment across the organization, but today, I want to mention that we recently hosted our 2024 Health System CEO and medical staff leadership conferences. We spent time reviewing our goals and the initiatives that will drive results over the next few years. It was energizing to see so much commitment from our local health system leaders, who are absolutely focused on executing our strategies and leveraging the resources and support available across the CHS organization. I remain excited about the opportunities ahead this year and into the future. During the conferences, we also discussed our enthusiasm to be on the leading edge of innovation, leveraging our size and scale to discover new opportunities and to improve care design, delivery, and outcomes, utilizing technology and joint venture partners that are focused on moving health care forward. Last quarter, Dr. Miguel Benet talked about our partnership with Google Cloud and worked to unify our data into a single platform that can enable the future use of AI in health care settings. This quarter, I've asked Dr. Lynn Simon, President of Healthcare Innovation and our CMO, to share more about innovation across CHS and in particular, our new partnership with Mark Cuban Cost Plus Drug Company. Lynn?

Thanks, Tim. Over the past several quarters, we have implemented a number of innovative programs at CHS, including remote monitoring for people with chronic conditions, virtual support for people living with depression and anxiety and other behavioral health issues. An AI-informed early warning system that alerts caregivers to potentially concerning trends during childbirth and a virtual tech-enabled telesitting initiative that is improving safety for hospitalized patients at high risk for falls. As we consider our approach to innovation, we also recognize there are opportunities to rethink and even disrupt the way we purchase products and services. As an example, our relationship with Mark Cuban Cost Plus Drug Company has the potential to generate significant advantages for our affiliated hospitals by addressing rising drug costs and drug shortages. We recently became the first health care system to purchase injectable drugs produced in the new Cost Plus Drug manufacturing plant in Dallas. Specifically, we purchased epinephrine, a life-saving drug on the FDA's list of current drug shortages, and norepinephrine for our hospitals in Texas and Pennsylvania. Through this strategic partnership, CHS will be advising and collaborating with Mark Cuban Cost Plus Drug about additional ways we can address pharmaceutical costs, avoid drug shortages, reduce waste, and improve medication administration safety and patient care. We expect this work to benefit not only CHS but also other forward-looking health care organizations. Tim?

Thanks, Lynn. Before I turn the call over to Kevin, I'd like to recognize CHS hospitals and providers for a significant accomplishment. A recent report from a global online reputation management firm that specializes in industries such as health care, financial services, hospitality, and property management recognized CHS as number one among the 50 largest health care systems for online reputation. This is the third year in a row we've ranked number one. In 2023, our hospitals earned a cumulative average 4.5-star rating on review sites such as Google, and our providers earned 4.8 stars. This speaks to our commitment to safety, quality, and patient experience. We appreciate the confidence of our patients and thank our local health systems for all they do to make health care accessible, compassionate, and worthy of this very positive feedback. Now I'll turn the call over to Kevin to review financial results. Kevin?

Thank you, Tim, and good morning, everyone. As Tim mentioned, we were pleased with the financial results for the first quarter, which keeps us on track to meet our guidance for 2024 that we provided in February. We're also happy to see the volume growth momentum that started last year continue into the first quarter of 2024, showing 3.8% growth in admissions, 1.9% growth in adjusted admissions, and 0.4% growth in surgeries, especially against a challenging comparison from the previous year. Net operating revenues for the quarter amounted to $3.140 billion, reflecting a consolidated year-over-year growth of 1%. On a same-store basis, net revenues increased by 5.7%, driven by a 1.9% rise in adjusted admissions and a 3.7% boost in net revenue per adjusted admission, positively influenced by better rates, additional state Medicaid funding, and strong inpatient growth. Although the volume improvements have been primarily driven by increases in Medicare Advantage business, we observed a more balanced growth profile in the first quarter of 2024, with growth in our commercial business as well. Adjusted EBITDA for the first quarter reached $378 million, up from $335 million in the same quarter last year, and down slightly from $386 million in the fourth quarter of 2023. Taking into account the sequential effects of the Bravera divestiture, which closed late last year, and a reduction in Mississippi Medicaid funding recognition in the first quarter compared to the fourth quarter, we view our nearly flat sequential EBITDA as a positive sign. The margin for the quarter was 12%, showing a modest sequential decline despite typical seasonal challenges that impact first-quarter performance, such as increased unemployment taxes and annual adjustments to copays and deductibles in our commercial sector. Year-over-year, the margin improved by 120 basis points. We see this as a strong start in relation to our mid-12% adjusted EBITDA margin guidance for 2024. We anticipate further margin growth through effective cost controls, ongoing volume growth, and top-line leverage. We are also pleased with our labor cost performance in the quarter. The average hourly wage increased by about 3% year-over-year. We expect an average hourly inflation rate of around 4% for the full year of 2024. Our progress with contract labor continued in the first quarter, with spending of about $48 million compared to $52 million in the fourth quarter and around $85 million in the first quarter of 2023. This aligns with expectations and largely reflects reduced use of contract nursing due to our retention and recruitment efforts, along with a lower hourly contract labor rate. Moreover, we have seen significant progress from our in-sourcing initiatives and other efforts to manage rising medical specialist fees over the last two years. Medical specialist fees remained flat compared to the first quarter of 2023 and slightly decreased from the fourth quarter. As Tim pointed out, we're seeing strong operational improvements in the 29 emergency department and hospitalist programs we've integrated in-house since last fall, along with two anesthesia programs brought in-house so far. We believe we can further scale these in-sourcing efforts and feel confident in managing future increases despite ongoing pressures, including in anesthesia. Cash flows from operations were $96 million for the first quarter of 2024, compared to just $5 million in the same period last year. This improvement was mainly due to better earnings and the timing of collections related to accounts receivables at year-end, resulting in an overall net decrease of approximately $39 million in accounts receivable since December 31, 2023. Capital expenditures for the quarter totaled $93 million, on track with our 2024 guidance range of $350 million to $400 million provided in February. Last week, we announced an agreement to divest Tennova, located in Cleveland, Tennessee, for about $160 million, with the potential for additional contingent consideration. We are actively evaluating opportunities for further divestitures in several markets that could result in total proceeds exceeding $1 billion. The sale of Tennova Cleveland is expected to close in the third quarter, and we believe one or more additional transactions could close within this calendar year, providing substantial capital that we can reinvest. Our net debt to trailing adjusted EBITDA stands at 7.7x, slightly improved from 7.88x at the end of 2023. With $618 million in borrowing capacity under the ABL and the anticipated asset sale proceeds, we believe we have more than enough liquidity to meet our needs moving forward. Concerning Project & Power, we are making steady progress. We successfully went live with the second wave of hospitals on April 1 without any disruption in care delivery. Our advancement is aligned with our timeline, and we are already witnessing the benefits of incorporating automation technologies that simplify certain manual administrative tasks for our nurses, as well as improving our business insights at the sites that are operational. We anticipate these benefits will lead to realized cost savings starting later this year and continuing into future periods.

We will now begin the question-and-answer session. Our first question will come from Jason Cassorla with Citi.

Great. I was just hoping you could dig a bit deeper on the cash generation in the quarter. Obviously, there's seasonality considerations. You talked about that AR release. Was there any impact from change in the cyber, I didn't hear that? And then, I guess, now that we're through the first quarter, how would you expect cash generation to play out for the rest of the year, just in context of your $500 million to $650 million embedded in guidance?

Thanks, Jason. So in typical or historical fashion, cash flow in the first quarter is typically our lowest cash flow quarter as a result of the reset of patient copays and deductibles and more of your receivables being patient responsibility. We did have the benefit in Q1 of getting some additional cash flow in as a result of the accounts receivable that built up in the fourth quarter, including that from the Mississippi Supplemental Medicaid program that was collected in the first quarter of this year. In terms of other kind of working capital items, they were all pretty much in line with our expectations. We always have a little bit of a headwind in Q1 with the payment of our annual bonuses, which occurs just once a year. Throughout the remainder of the year, as bonuses are accrued, that kind of turns itself around. Similarly, we'll have that situation in the second quarter as we fund our 401(k) plan just once annually. Therefore, that also has a negative impact on second-quarter cash flows, but turns around throughout the remainder of the year as we build our accruals back up. In terms of our guidance on cash flow, at this point of the year, I think we're right in line and are comfortable with where we're guiding at.

I wanted to follow up on the Tennessee Hospital sale agreement. Can you provide insight on the revenue and EBITDA contribution of that asset, and what the implied EBITDA multiple would be if the Tennessee supplemental payment program is approved? It seems like you're still targeting $1 billion in proceeds from divestitures. Any additional details you can share about your divestiture plans, their progress, and your observations in the market would be appreciated.

Sure, we will. And let me follow-up to the second part of your first question as well related to change. We did not see any impact or nothing material as a result of any cash flow slowdown from Change Healthcare's breach. We did not use them for billing and collection purposes. So that did not have an impact on us. Relating to the divestitures, the base price of the $160 million is essentially a 10x EBITDA multiple on trailing EBITDA for Cleveland. Any contingent payment above that would put the complete purchase price somewhere in the low teens multiple on a trailing basis. In terms of how Cleveland's margin profile, they operate pretty similar to our kind of corporate average margins. So you can probably do the math in terms of getting a revenue contribution.

The next question will come from Brian Tanquilut with Jefferies.

Congrats. I guess my first question, there's a lot of discussion among investors on the monthly flow or monthly trend in volumes, obviously, with the calendar moves in Q1. Just curious what you can share with us in terms of what January or February or March looks like? And how is that translating to April in terms of, obviously, we're on a more normalized calendar this quarter.

Sure. So probably like most people, we saw pretty strong January and February, some softness year-over-year in March. But I would really attribute that to how the calendar lined up with February having an additional business day this year with leap year and then March's calendar had really two things going against it; one had one fewer business day with just how the calendar lined up. Additionally, you also moved Good Friday and the Easter holiday into March, whereas it was in April of last year. So that has some impact, not only from being a holiday but also around spring breaks in a number of markets that schools often schedule spring breaks around the holidays. We think that probably had some contribution to some of the volume trends that we saw in March. In terms of how we view that going forward, I think overall, it was a strong volume quarter for us, and we see the momentum from that continuing on and don't believe that the volatility monthly in the first quarter really influences as much on how we're thinking about future quarters.

Got it. Okay. And then maybe, Kevin, just a quick cash flow question. The payout to the NCI during the quarter was probably higher than typical. So just curious what the moving pieces are there? And how should we be thinking about NCI payments going forward?

Yes. We're still comfortable with where we kind of guided for the full year, which is about $150 million, I believe, on total NCI payments for the year. There was just some timing with some items accrued from the fourth quarter that carried forward into Q1 on NCI payments. But I would expect those to be on a more regular run rate beginning in Q2.

The next question will come from Ben Hendrix with RBC.

It looks like SWB was a little favorable to our assumptions and perhaps to what you had guided to for the year. I was just wondering how you're thinking about the rest of the year. If any outperformance in the first quarter pads the year expectations or if there's any reason to think that we might see some added inflation in later quarters?

Sure. Coming into the year, we anticipated about a 4% wage inflation on an average hourly rate basis for the year. If we think about the sequence last year of inflation, it was high early in the year, began to moderate in the back half of the year, where we saw wage inflation in the third and fourth quarter in the low 3% range. That has carried over into the first quarter, although we expect for the year, there could still be some pressure on wages and maybe some potential in individual markets, maybe not across the board, but in certain markets, we can see higher wage growth than other markets, and we do believe there could be some pressure in the back half of the year. It is a nice start to the year, and we think that's very favorable in terms of our outlook and where it could ultimately end up for the full year.

Yes, Ben, I'll add on to that. This is Tim. I think the other item that we baked into our guidance was more of the insourcing of some of these hospital-based specialties and a higher average audit rate on those professionals. With anesthesia, more in-sourced ED and hospitals programs in our pipeline, we anticipate that we'll have some increase or had some impact on the average audit rate increase as well. We also have a good strong pipeline of physician recruitment into our clinics, which also hits our SWB line as well.

And maybe the last comment that I would make in terms of the mix, as Tim mentioned, the mix of employees coming in, many at a higher rate that could drive that up. We've also been very effective at bringing in some allied health workers and making changes to our care delivery model that allows us to treat patients with more LPNs, nursing assistants, and making those adjustments that had a favorable impact on our salaries, wages, and benefits.

Great. And if I can just follow-up on the in-sourcing comment. Clearly, you guys have made some really good progress there. But I was just wondering if there are any risks of in-sourcing, maybe could bringing in more ED and the hospitalist impair your ability to flex staff to volume fluctuations in any way? Or is that not a concern?

Sure, Ben. I'll start answering that one. I don't see any real risk in relation to that. We have a good mix of employed and contracted personnel. Some of the staffing mechanism is through a per diem or a per-day rate type of arrangement. So that is pretty flexible in terms of how we run the model.

Yes. We've mentioned this before, and maybe it hasn't been completely clear, but even where we've in-sourced these programs, not all of those physicians become employees, although the majority do. A number of those physicians are still contracted employees, and that contracting expense is down in our other operating expenses still. That gives us some of the flexibility, I think, to address what you're talking about.

The next question will come from A.J. Rice with UBS.

First, I was just going to ask, when I look at some of your volume metrics, same-store admissions up 3.8%, adjusted admissions at $1.9 million and surgery is up 0.4%. It's a little unusual to see the inpatient side growing faster than the outpatient side. Can you comment on any dynamics you're seeing there? And was there a divergence between what you saw inpatient versus outpatient on the surgeries?

Sure. I'll start off and Tim, please feel free to jump in. We have done a lot of work around length of stay management. By doing that, we've opened up capacity by getting patients appropriately discharged and timely. That's helped open up capacity, allowing more admissions to be brought in. Our transfer center that we've talked about for some time has contributed significantly, particularly in those markets where we were able to add that capacity through length of stay management. So I think that has been a big favorable mover and has allowed us to grow inpatient at a faster rate this past quarter. As we look out for the remainder of the year, we've also, as Tim mentioned, opened up the bed tower in Knoxville, Tennessee, on April 1. That's going to give us some additional capacity going into Q2. We have the bed tower in Foley, Alabama, that's opening up in the fourth quarter. We still see opportunities. We're growing both inpatient and outpatient, but still being able to bring in additional inpatient throughout the remainder of the year.

Yes, I agree. And A.J., in terms of the surgery mix, we saw growth on both the inpatient and outpatient side, so pleased to see that. On the outpatient side, I think we outpaced it on absolute numbers just with our ASC growth and our focus on driving some really strong outpatient surgical sites of care. So we're pleased to see that happen. Going back to the inpatient growth in the quarter, as Kevin said, the transfer center is performing as designed. We also added new specialties into markets where we had insights that we weren't able to accept those patients in prior periods. So it's good to see our service line and acuity agenda are really delivering better access to patients in the communities we serve, yielding the expected growth in acuity and revenues.

That's great. For my follow-up, I would like to ask about the payer mix. It appears that managed Medicare increased by about 90 basis points, while fee-for-service declined. Can you provide insight into whether you are experiencing significant volume growth in managed Medicare, or if it is driven by rates? What is contributing to that increase as a percentage of revenues? Also, any updates on general contracting with managed care would be appreciated.

Sure. The volume increases are still being led by Medicare Advantage, and substantially all of our Medicare business increases are all Medicare Advantage. What we did experience this quarter was a little more balanced growth between Medicare Advantage and Commercial. I think we had indicated in the fourth quarter that early part of 2023, MA was growing at about a 3 for 1 ratio to Commercial in the fourth quarter. It improved to only a 2-for-1 ratio, and we continued on in the first quarter at approximately that 2:1 ratio growth. There was some slowing in that Medicare Advantage growth business. In terms of contracting, it's still early in the year, but we're seeing early signs that would probably point to similar rate increases for '25 that we are experiencing and looking to or already have locked in for '24.

Next question will come from Stephen Baxter with Wells Fargo.

This is Nick on for Steve. I wanted to follow-up a little bit on the payer mix question to start. So it looked like Medicaid mix was actually up a little bit year-over-year. So I wanted to see if that was more driven by an increase in Medicaid supplemental payments or actually a patient mix shift? And then maybe just an update on what you're seeing from Medicaid redeterminations.

Sure. The increase in Medicaid net revenue is primarily due to the Medicaid supplemental programs. In terms of dollars, the Mississippi was the big change year-over-year. That program, which we'd recognized $40 million in Q4 for six months' worth as that program just got approved and was retroactive to July 1, one quarter's worth of that full program that was approved is about roughly $80 million on an annual basis. We recognized the first quarter's portion of that in Q1. There was zero of that in last year's numbers. That was the primary driver of the Medicaid increase, although we did have a small increase in Medicaid volume too during the quarter. In terms of redetermination, we're not really seeing any substantial impact. There are certainly patients who are losing Medicaid insurance; we're seeing a slight uptick in self-pay volume, but we're also seeing an uptick of commercial volume. A portion of those patients who are losing Medicaid are picking up exchange business insurance or commercial insurance that's far offsetting any of the negative impacts.

Next question will come from Andrew Mok with Barclays.

There's been a lot of discussion around the 2-midnight rule for MA plans and the impact that might have on acute hospitals. Would love to hear your take on the role and if and when you would expect to see any impact from our plans?

Yes. We're continuing to evaluate. I know there's been some additional guidance put out there by CMS. At this point, I think it's still early, and I'm not sure that we can really quantify the impact. There's a number of moving parts around that, which include work that we're doing ourselves internally with a physician adviser program that we've stood up that allows us to ensure that we're getting the appropriate documentation. We've also brought in-house the peer review process with the payers; both of those things should be beneficial to us. Then this quarter, we also had the situation with Change's breach, and Change indicated that they were going to no longer require pre-authorization for certain services. So that weighs into the calculation in Q1 as well as some of the regulation from CMS for the payers about the 2-midnight rule. Throw all those in, I'm not sure it's very difficult to differentiate the impact of each individual one. I would say at least on the margins, we saw a little bit of improvement in Q1. Overall, though, denials still continue to increase. There’s a little bit of continued pressure. We may see some benefit in one area, but there's continued pressure in other areas and even on the commercial side from denials. I'd just again say it's kind of difficult at this point to measure, but we're keeping a close eye on it and hope we see some more clarity later in the year.

The next question will come from Josh Raskin with Nephron Research.

Looking at occupancy rates overall, they're up nicely from pre-pandemic. I'm curious how much of that is due to changes in the portfolio over the last couple of years versus an organic or same-store improvement. Where does occupancy need to get to in your mind to get to that sort of 15% intermediate target on margins?

Sure, Josh. This is Tim. I'll kick it off. In terms of the occupancy rate growth, we think that's driven through the items we mentioned previously, such as the growth of the transfer center and higher acuity services. There are some adjustments to the portfolio when we divest smaller, more rural hospitals with a higher bed count and a low occupancy rate. Obviously, that helps our stronger markets where we run higher occupancy rates to shine through. We don't necessarily have an internal target, if you will, because of the changes in the portfolio. The other part of the equation that makes it difficult for us to really track occupancy rates in an absolute basis is we also have outpatients in those beds, which are not factored into the occupancy rate calculation that you're seeing there. We have seen the growth of our outpatient observation business over the last several quarters, as you know, across this industry. In general, we are very, very focused on understanding the physical footprint of every one of our campuses to optimize that footprint, decommissioning any spaces that may not be necessary so that we're not running any additional fixed costs that are necessary for whatever volumes we can bring into that health care system.

Got you. That's helpful. And then just on supply expense, down about 80 basis points year-over-year despite sort of the shift in patient continued increase in the acuity and things like that. So what's driving the supply expense improvements?

I think there's a number of things driving some supply expense improvement. It's relatively flat on a per adjusted admission basis, which would indicate that we are stepping over inflation and managing that well. We're doing that with a number of supply chain initiatives we've put in place to ensure we're getting the best pricing and taking advantage of scale. We are implementing our ERP, which we talked about, Project & Power. I can't say that we're realizing a lot of savings currently yet because we only have a handful of hospitals up and running through the first quarter, and it's still relatively new, but it's positioning us with significantly improved information that will allow us to manage that expense going forward. Back to the quarter, the payer mix and maybe surgical mix probably had a significant impact on our ability to manage that supply expense with fewer high-dollar implant items during the quarter. The growth in net revenue, the top-line growth, I think, had some dilutive impact on that calculation as a percent of net revenue, bringing in your Medicare and Medicaid supplemental program revenue, as well as the inpatient and growth in kind of medical cases, which can have a lower supply cost as a percent of net revenue.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tim Hingtgen for any closing remarks. Please go ahead.

Great. Thank you, Chuck, and thanks to all of you for joining our call today. We remain committed to achieving our goals for 2024 and look forward to updating you again at the midyear point. 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.