Good day, and welcome to the Community Health Systems Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Anton Hie, Vice President of Investor Relations. Please go ahead.

Thank you, Jay. Good morning, and welcome to Community Health Systems's third quarter 2024 conference call. Participating on today's call are Tim Hingtgen, Chief Executive Officer; Kevin Hammons, President and Chief Financial Officer; and Dr. Miguel Benet, Executive Vice President, 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 on our website. All calculations we will discuss exclude impairment expenses 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, expenses related to employee termination benefits and other restructuring charges, and change in estimate for professional claims liability. With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.

Thank you, Anton, and thanks everyone for joining our third quarter earnings conference call. I'd like to begin by addressing the impact of back-to-back hurricanes, Helene and Milton. The hurricanes impacted several of the communities we serve, primarily in Florida, Georgia, and East Tennessee. As a result, in late third quarter, and early fourth quarter, CHS hospitals most likely to experience severe impact ramped down services and canceled elective procedures. In total, three of our facilities were evacuated and closed consistent with local orders. The biggest impact occurred in our ShorePoint Health System located south of Tampa, Physicians Regional Healthcare System in Naples, and Tennova Newport in East Tennessee. Most significantly, ShorePoint Punta Gorda experienced major damage due to flooding. The hospital remains closed today and remediation efforts are currently underway. Hurricane readiness and response has proven to be a core competency at CHS, and I want to note that the effort to safely evacuate patients was enabled by terrific coordination between our hospitals, our CHS transfer center operation, and numerous other corporate resources that worked around the clock to be ready for Helene and then Milton. Our hearts go out to all affected by these terrible weather events. And I just want to mention that our CHS Cares Fund, which was established to help employees in need of financial assistance following an unforeseen disaster or situation, has already been supporting hundreds of impacted team members. Kevin will talk more about the financial impact of the hurricanes on the third quarter results in just a moment. Despite the late quarter hurricane impact, same-store volumes improved, with a 2.4% increase in admissions and a 2.6% increase in adjusted admissions over the prior year quarter. Surgeries improved 3.1%, led by growth in lower acuity outpatient cases driven by our consistent investments into ambulatory surgery sites of care. While patient demand for services was good overall, inpatient acuity skewed lower than expected, affecting net revenue, which totaled $3.09 billion in the quarter. Adjusted EBITDA was $347 million. Our third quarter results were affected by a continued increase in denials and downgrades by insurers. We are seeing some payers aggressively deny payment for medically necessary services that have been provided for our patients. For several quarters now, the challenges we and our industry are facing regarding increasing denial activity by payers have been well documented. Over the last few years, in response to this challenge, we have stood up and enhanced our utilization review program and centralized physician advisor services to ensure our patients are placed in the correct care status and that we receive the appropriate payment for their care. As a result, our physician advisor service has been able to obtain a high rate of reversal on initial payer denials. Nevertheless, the rate of denial activity by payers continues to grow and has continued to pressure our top line. We are making incremental investments in our centralized patient financial services processes and teams as well as our Physician Advisor Program to continue to advocate for the appropriate classification of care for our patients and payment for the services our health systems provide. While the quarter did not fully meet all of our expectations, I remain very proud of our team's ability to face unexpected challenges head-on, and I'm optimistic about our opportunities. We expect normal seasonality improvements in the fourth quarter, and we remain optimistic that our focus on adding incremental inpatient capacity, outpatient access points, and recruitment of specialists necessary for Ohio Acuity service lines will position our health systems for growth into 2025 and beyond. We have been delivering upon our strategic growth plans across our health systems fueled by key capital investments. A few recent and notable investments include our Knoxville North Tower expansion, which opened earlier this year and is ramping up well. The new capacity was a catalyst for strong incremental patient volumes, posting a double-digit increase versus the same quarter last year. And this Saturday, we are opening a new patient tower and incremental surgical capacity in Baldwin County, Alabama. These developments are core components of the nearly $200 million campus expansion taking shape there, all of which will create capacity for incremental market share gains in this rapidly growing region. On the outpatient side, we now operate a total of 18 freestanding ED locations following the opening of new centers in Huntsville, Alabama, and Lake Granbury, Texas. We also completed the expansion of the hospital emergency department at Grandview Medical Center in Birmingham, Alabama. All of these projects have resulted in immediate volume growth. And we recently announced a definitive agreement to acquire Carbon Health's 10 urgent care locations in the Tucson, Arizona market. This will expand our urgent care footprint to 17 locations across that market. We expect that transaction to close this quarter. My confidence in our strategic direction, health system leadership team, and especially the women and men who provide care for our patients is at an all-time high. The services we provide are critically important to our patients and communities, and our commitment to providing that care while also achieving strong operating and financial results is unwavering. With that, Kevin, let me turn the call over to you.

Thank you, Tim, and good morning, everyone. Underlying demand for care in our markets remained strong, leading to the same-store volume growth, including a 2.4% increase in admissions and a 2.6% increase in adjusted admissions. Same-store ED visits were up 0.8%, and surgeries were up 3.1%. As a result of Hurricane Helene, during the third quarter, one of our facilities was forced to evacuate patients, and several facilities saw delays in scheduled electives. We estimate an approximate $7 million impact during the third quarter from missed revenue and incremental costs. However, ShorePoint Health Punta Gorda remains closed due to the extensive damage suffered from both hurricanes and will continue to be a headwind throughout the fourth quarter as it will be closed for the remainder of the year. Net operating revenues for the quarter were $3.09 billion, up slightly year-over-year on a consolidated basis. On a same-store basis, net revenue increased 5.1%, which remained consistent with our target for mid-single-digit growth for the year. The same-store top line growth was driven by the 2.6% increase in adjusted admissions along with 2.5% growth in net revenue per adjusted admission, which largely reflects improved rates and incremental reimbursement under State Medicaid programs, partly offset by lower acuity. We were pleased to see solid volume growth, including growth in our commercial book. However, the service line mix of the business was less favorable than expected, with overall case mix index down 60 basis points from the prior year, reflecting declines in both the surgical mix and the surgical CMI. Adjusted EBITDA for the third quarter was $347 million compared with $360 million in the prior year period. Margin for the quarter was 11.2%, down from 11.7% in the prior year period. Contributing to the lower than expected EBITDA, we've continued to experience significant increases in initial denials and downgrades by managed care plans, with more than half of the incidents coming in the Medicare Advantage book. While denial activity is not new, the tactics used by the payers have become more aggressive, and we have experienced an approximate doubling of denials in the quarter compared with the prior year, which is an increase above our expectations. This resulted in an approximate $10 million headwind for the quarter. As Tim noted, we are taking action to help ensure that the care we are providing is properly classified and reimbursed, including further expansion of our centralized physician advisor program along with additional steps to mitigate increased denials in the future. Moving to expense management. We were once again pleased with our performance on labor costs. Average hourly wage rate increased 3.9% year-over-year, consistent with our expectations for the full-year. Contract labor spend was down 24% year-over-year and declined $4 million sequentially to $41 million in the third quarter, which was better than our expectations and reflected the continued progress made possible by our recruitment and retention efforts. We continue to see a meaningful improvement in controlling supplies expense, which on a same-store basis was down 1.3% per adjusted admission in the third quarter. As we move more hospitals onto our new ERP, we are gaining additional insights we can leverage to improve efficiencies and reduce supply expense. Medical specialist fees increased $15 million or approximately 10% from the prior year period with notable pressure in anesthesia. This was slightly higher than expected in the third quarter, but overall, we remain pleased with the progress of our hospital-based provider in sourcing initiative. Since launching in August of 2023, the in-source platform has expanded significantly in coverage of ED and hospitals programs and is only just beginning in anesthesia with the first large market coming online in the fourth quarter. We have an active pipeline of additional programs coming in-house in the coming months and many others under consideration. During the quarter, we booked a $149 million increase to our professional claims liability accrual based on a review by our new actuary. This change in estimate considers the national trend of outsized verdicts and propensity for larger claim settlements that have been experienced more recently, which is broadly being referred to in the industry as social inflation and the exposure of adverse development in our outstanding claims if this environment persists. Although we've not been the subject of any recent nuclear verdicts, we have experienced increased settlement amounts over historical averages, including those in jurisdictions that have historically resisted this behavior. Furthermore, the majority of this change in estimate relates to claim activity and development from previously divested hospitals and is therefore not reflective of our current run rate of new claim activity, which has been much lower as we have made material improvements in our safety and quality outcomes. In fact, our improvements in some cases are industry-leading, and I've asked Dr. Miguel Benet to comment for just a minute on some of these most recent accomplishments.

Thank you, Kevin. CHS has a long-standing commitment to advance clinical quality and patient safety, and that commitment is ingrained into our culture at every level of the organization. We're very proud of the many positive results that we are achieving, especially this year, and we are confident that we can continuously improve quality and safety, producing better outcomes and higher value for our patients. CHS began monitoring our organization-wide serious safety event rate more than a decade ago. Significant improvements in this area have saved lives and spared thousands of patients from preventable harm. That work continues, and I would like to highlight achievements in three specific areas, including: First, we've achieved a nearly 20% improvement in our risk-adjusted mortality index from the prior year period, which puts CHS in the top quartile of all U.S. hospitals. There are many initiatives that have led to this accomplishment, including a company-wide focus on immediate treatment of patients with sepsis. We've also achieved a nearly 24% improvement versus the same period last year in our patient safety and adverse event composite from CMS, which measures effectiveness in protecting patients from complications. The improvement places CHS in the top 5% of hospitals nationwide. And we're pleased to report a 27% year-over-year improvement in our precursor safety event rate, continuing our trend of reducing serious safety events almost every quarter since the baseline was established in 2012. Our data science program is maturing and providing insights to help identify areas like these where we can optimize our clinical outcomes and deliver further improvements across the organization. Of course, it is the physicians, nurses, and other caregivers who commit daily to providing high-quality care for their patients and make these accomplishments possible. We certainly appreciate your dedication to quality and safety. With that, Kevin, I'll turn it back over to you.

Thank you, Miguel. Back to our financial review. Cash flows from operations were $67 million for the third quarter of 2024 compared with $29 million in the year-ago period. The year-over-year improvement in cash flow primarily reflects improved cash flow from changes in working capital, including the conversion of accounts receivable as expected. Capital expenditures for the third quarter of 2024 were $70 million and for the year-to-date were $251 million, on track for our 2024 guidance range of $350 million to $400 million. In August, we completed the divestiture of Tennova Cleveland and used part of the proceeds to extinguish approximately $143 million of principal value of our 5⅝% senior secured notes due 2027 through open market repurchases, utilizing cash on hand. We continue to make progress towards our $1 billion divestiture plan. We anticipate the majority of the remaining transactions to be completed in the fourth quarter, with final closings carrying over into the first quarter of 2025. At the end of the quarter, net debt to trailing adjusted EBITDA was 7.6x, consistent with the prior quarter and improved from 7.9x at year-end 2023. We continue to believe we have more than adequate liquidity to meet our needs going forward, with approximately $440 million of borrowing capacity under the ABL along with pending asset sale proceeds. Our implementation of a new ERP and workflows, along with standardization of data under our Project Empower, enters the final innings. As of October 1st, we have all of our subsidiaries up and running on the new financial and supply chain platforms and transitioned into our shared service environment. We are on track to complete the implementation of the ERP by transitioning onto the new workforce management tools for HR, payroll, and timekeeping, thus completing the bulk of the transition work in the first quarter of 2025. As we enter 2025, we will benefit by having the investment in disruption behind us, and we can focus on optimizing our use of the new tools and benefit realization. With one quarter remaining in 2024, we are adjusting our guidance range as we continue to assess the impact of Hurricane Helene and Milton on our operations. Specifically, we now anticipate 2024 adjusted EBITDA of $1.5 million to $1.54 billion, which consistent with prior guidance, does not include any contribution from potential new supplemental payment programs nor does it assume any future divestiture activity. While not yet providing formal guidance for 2025, in response to repeated investor inquiries and in the interest of transparency, we are providing an initial estimate of the potential benefit from the new or expanded state-directed payment programs in New Mexico and Tennessee. Both programs have been approved by the respective legislatures and governors and submitted to CMS, where they are currently awaiting approval. At this time, based on our interpretation of the programs as designed and the various puts and takes, we estimate an aggregate EBITDA benefit of approximately $100 million to $120 million annually. This concludes our prepared remarks. So at this time, we'll turn the call back over to the operator for Q&A.

We would now begin the question-and-answer session. Our first question comes from Brian Tanquilut with Jefferies. Please go ahead.

Hey, good morning guys. Maybe, Kevin, I'll touch on that last comment you made just on the DPP. So $100 million to $120 million, this is just for New Mexico and Tennessee. And then is this net of provider taxes just to clarify that?

Yes. That is the aggregate amount from both Tennessee and New Mexico on an annual basis and is the net EBITDA benefit. So that would be net of the provider taxes. So there would be a gross-up impact on net revenue and then additional expense. It is also net of what we may see in terms of sunsetting some existing reimbursement benefit and maybe some additional cost that we could incur as a result of these plans being approved as we've seen in the past and some other state. So that is what our current estimate is of our EBITDA benefit on an annual basis. I would remind everyone that if those are approved in the fourth quarter, as we expect, they will be retroactive back to July 1, 2024, so we could potentially get six months' worth of that, again, if CMS approves them during the fourth quarter.

Understand. And then maybe, Kevin, as I think about your EBITDA guidance change and the free cash flow guidance change, maybe if you can bridge me from that $40 million cut to EBITDA to the $100 million cut to free cash flow, just curious.

Sure. There's a couple of other things that I'd point out. So obviously, a big one there is the reduction in EBITDA. The denials and truly the slowdown in the adjudication process is also having an impact on our cash collections. A number of the claims that have been denied are still not through the final adjudication process, and that seems to be continually slowing down. So we've taken that into consideration. There is a small amount of some state program monies that we, as stock, might get approved in the third quarter that will be approved in the fourth quarter, but the cash for those will likely slip into the first quarter of 2025. So that's just a matter of timing. And then with one of the divestitures in Pennsylvania that we have announced that we expect to close in the fourth quarter, we are selling working capital with that. So net working capital gets pulled out in the anticipated collections related to those receivables won't be in the fourth quarter.

Next question comes from A.J. Rice with UBS. Please go ahead.

Thanks. Hi, everybody. I want to revisit the change in EBITDA guidance, which reflects a reduction of about $40 million at the midpoint. It seems that around $18 million of this is attributed to variances in the third quarter, including the impact of hurricanes. This leaves approximately $22 million for the fourth quarter, assuming my calculations are correct. Given the timing of the second hurricane, you likely have more hurricane-related impacts to consider. Additionally, I'm curious if there has been any adjustment in your liability accruals based on the updated charges from the third quarter, and whether any operational changes are anticipated for the fourth quarter.

Thanks, A.J. I believe your calculations are correct. Approximately $18 million of the $40 million change at the midpoint is attributable to the shortfall in Q3. The remaining amount is divided between the hurricane impact in the fourth quarter, particularly with Punta Gorda being closed for the entire quarter, along with the disruptions caused by Milton hitting early in the quarter. There’s definitely some EBITDA or EV business that we will lose from those days. We hope to recover some of the elective surgeries. There are no operational changes being implemented. Regarding the MedMal expense, our increased liability doesn't significantly affect our future run rate. We had already been raising the expense run rate, so that is already accounted for, and this adjustment simply involved reviewing the base claim amounts. We don't anticipate a major impact on the run rate from this. Additionally, I want to emphasize that regarding our guidance change on net revenue, we reduced the net revenue by $100 million at the midpoint. This is primarily due to accounting for the announced divestitures in Commonwealth and North Carolina, including a small hospital in North Carolina, and adjusting the fourth quarter revenue as we expect those deals to close during the quarter. A smaller part of the net revenue adjustment also relates to the hurricanes and denials.

The next question comes from Andrew Mok with Barclays. Please go ahead.

Hi, good morning. Just wanted to follow up on this denied claims headwind. One, when did that start to materialize as a headwind in the quarter? And two, what can you do to combat this going forward? Do you have a stronger appeals case for these newer denials than what you would typically have? Thanks.

Throughout the quarter, there has been a continued ramp-up, and the slowdown of the adjudication process remains a persistent issue. As indicated by our revised guidance for the fourth quarter, we anticipate this problem will continue moving forward. While there wasn't a single event in the quarter that clearly indicated a change, we are observing a gradual increase in both denials and the duration of the adjudication process. We've been successful in about 25% of the denied cases that involve stays longer than two midnights. However, almost 70% of the initial denials from claims this year are still under consideration or have yet to be finally adjudicated.

Yes, Andrew, this is Tim. I'll elaborate on that. We have been seeing an increase in denials throughout the year, with most of this activity stemming from the previous year due to the lengthy denial appeal process. This quarter, we experienced a rise above the run rate we saw in the first and second quarters, which accounts for the $10 million difference that Kevin mentioned. This was an unexpected increase in the third quarter.

Got it. And if I could just follow-up. Is this broad-based activity across most of your payers? Is this more concentrated among a few? Thanks.

It's relatively broad-based.

Yes, I would agree.

And maybe to your other question about things that we're changing or can do going forward. We do now are in a position to have physician advisor coverage across our entire portfolio, as well as having a more robust kind of appeals capabilities to go after some of these initial denials.

Thank you very much. I would like to follow up on the $22 million EBITDA guidance you anticipate for the fourth quarter. Can you break down that figure between the contributions from Punta Gorda and the other hospitals versus the impact of claim denials? I'm curious whether those claim denials are projected to keep increasing into the fourth quarter. Additionally, could you clarify any influence outpatient acuity may have on that $22 million figure?

Yes. I would say more than half of that $22 million is hurricane impact. I would say the denial impact would look similar to Q3. And then the remainder being hurricane impact.

Thanks for that. I just wanted to follow up on the softer outpatient acuity. Can you discuss the factors contributing to this outpatient acuity softness? Is it related to the calendar? One of your peers mentioned expectations for potentially higher volumes of lower acuity in the second half of the year. I'm curious if you anticipate this trend continuing for the rest of the year and how it might affect 2025. Thanks.

Hey, Ben, this is Tim. I'll start it off and invite Kevin and Miguel to chime in. Just to clarify, the softness in the acuity that we called out was on the inpatient surgery side of the business. We had good, strong surgical growth in the quarter, as we pointed out earlier in our remarks, but that was primarily on the outpatient side of the business. We did see growth on inpatient surgery, but they were in the lower acuity inpatient surgery category. I think impacting that inpatient surgical acuity was just some continued site of care migration of our total joints to the outpatient side the last year. In the previous quarters, we had more inpatient total joints. We see more of that migrating into the ambulatory surgery environment. And just to clarify, we believe we're capturing that within our ambulatory surgery environment. We did a large expansion in one of our orthopedic focused centers in Indiana, that is really ramping up very nicely. So that does have an impact on the surgical acuity. We did see softer inpatient surgery volumes on elective spine cases. We saw some softness on CVT and Vascular services. Those are the areas where we believe we'll pick those back up in the fourth quarter with focused efforts of getting those patients back in for their care. Just to point out, our clinic visits in the third quarter, we always say that's a decent bellwether of what we can expect for volumes down the road. We did have really strong clinic business even factoring in the hurricane impact market. So we have no reason to believe that demand is just a softening overall. We believe it's more of a timing issue.

Hi, thanks. I know it's early for 2025 commentary, but just wanted to get your sense of how we should think about perhaps the 2024 revised guidance as the jump-off point because I guess, first, wondering like is it reasonable to expect essentially getting back all of the hurricane headwind, and you move into 2025? Or would you expect that there'd be any lingering disruption there? And then I guess, as we think about this incremental $10 million of denials, I assume obviously you're factoring in a bit similar for the fourth quarter. I guess what we also then have to consider as a headwind to maybe Q1 and Q2 before you lap that and maybe all these things are offsetting and this is a good jump-off point? Or should we think about it perhaps differently, let's get some insight there? Thanks.

Sure. So there are some moving parts. But I think 2024 is a good jumping off point, we will have some divestitures here either in late fourth quarter or early first quarter that would need adjusted. Certainly, the DPP programs, which are not in 2024 and not in our guidance that we're hopeful to get approved here in the fourth quarter, but we certainly expect those to be in place in 2025, assuming CMS approves those so that's kind of a meaningful change for us. In terms of disruption around the hurricane, it will take some time before we get insurance business interruption insurance settled. But some of this disruption that we're seeing here in the third and fourth quarter, we will be getting reimbursed through business interruption insurance. But again, that will take some time, and it's not going to be this year. And I would hope that with the full-year ahead of us in '25 that we can come to some agreement with the insurance companies and get that settled in 2025 as well as having some reimbursement for property damage in 2025 as well. So again, some moving parts, but I think from base operations, we're continuing to make progress with some of our strategic investments, opening the new tower here in the fourth quarter that Tim mentioned earlier in the year, another one in Knoxville, and as we continue to recruit specialist and make other investments in outpatient locations, I think we can continue to grow volume and grow earnings from there.

I think that's well said. Stephen, I'll add on in terms of hurricane disruption. For the Punta Gorda facility that remains closed, that's part of our ShorePoint Health network, which has a larger hospital in Port Charlotte. We have been successful in migrating some of that care over to the Port Charlotte campus to mitigate some of that disruption of having a campus shut down, but we do not have the access for ED services. We also had a larger behavioral health program that is running at a more reduced capacity at the Port Charlotte campus. So there's some things that we can't necessarily overcome within one quarter. So just want to put some color around that. In terms of the timing of Milton, unlike Helene happening in the last week of a quarter, with Milton being in the first week of the quarter, we do see opportunities to work those patients back into the surgical side, the procedural side of the business for sure through the remainder of the quarter. We stay close to those patients and providers. Right now, it's call me the case after a major natural disaster. Those patients maybe don't come back the first week or second week after an incident like this. They're trying to get their homes and their lives back in order, but we believe we can get them back in by the end of the quarter.

Hey, thanks for letting me ask the follow-up. Maybe, Kevin, as I think about the revenue per adjusted admission, the KPI for the quarter, just curious, I mean, as I look at the payer mix improving, obviously, you called out acuity, but how should we be thinking about putting all that together in the outlook for revenue per admission?

There are opportunities for continued growth. Bringing acuity back will certainly help. It's important to note that we have experienced some loss in Medicaid business due to redetermination, but we are gaining more from health care exchanges, which is a positive for us. We've observed some shifts in commercial insurance and health care exchanges that are not favorable, yet we still see resilience in our managed care figures. Additionally, there was geographic variation this quarter. Not all commercial contracts are the same across different locations. Losing commercial business in one area with higher rates, while gaining it in another area with lower rates, means we might be receiving lower reimbursements overall, even if the volumes remain steady. Ultimately, these fluctuations should balance out over the year and aren't expected to hinder our progress moving forward. We anticipate continued growth. Reimbursement rates for Medicare will be advantageous next year, our commercial contracts are reflecting similar increases as this year, and some Medicaid DPP programs could significantly enhance our earnings from Medicaid business in the future. Yes. Thank you.

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

Thank you, Dave, and thanks to all of you for joining our call today. As always, if you have additional questions, you can reach us at 615-465-7000. Have a great day.

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