Earnings Call Transcript - CYH Q4 2025

Operator, Operator

Good morning, and welcome to the Community Health Systems Fourth Quarter and Full Year 2025 Earnings Conference Call. Please also note today's event is being recorded. I would now like to turn the conference over to Anton Hie, Vice President, Investor Relations. Please go ahead.

Anton Hie, Vice President, Investor Relations

Thanks, Rocco. Good morning, and welcome to Community Health Systems Fourth Quarter 2025 Conference Call. Joining me on today's call are Kevin Hammons, Chief Executive Officer; and Jason Johnson, Executive VP and Chief Financial Officer. Before we begin, I'll remind everyone this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC. Actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We've also posted a supplemental slide presentation on our website. All calculations we will discuss today exclude gains or losses from early extinguishment of debt, impairment gains or losses on the sale of businesses, expense from business transformation costs and changes in estimate for professional claims liability in the prior year period. With that said, I will turn the call over to Kevin Hammons, Chief Executive Officer.

Kevin Hammons, Chief Executive Officer

Thank you, Anton. Good morning, everyone, and thank you for joining our fourth quarter 2025 conference call and for your continued interest in CHS. First, I'd like to say I'm honored to speak to you today as CEO of Community Health Systems. I want to express my sincere gratitude to our Board of Directors for their support and their confidence in appointing Jason and myself to our permanent roles as CFO and CEO, respectively. I would also like to thank many of the people on this call for offering your support and congratulations, which has meant so much to me personally. And of course, I want to acknowledge our employees and physicians and everyone else who contributes to the quality care provided for our patients every day. It is my honor and privilege to lead CHS forward at this point in time and to serve all of you in this role. Reflecting on these past few months, I used my time as interim CEO to speak with many of our employees and physicians. And most importantly, to listen to their thoughts about our current state and future potential of our company. The feedback was candid and enlightening and encouraging. And I entered this year excited and very optimistic about what lies ahead for CHS. Today, I want to share some highlights of our 2025 operating results, but I also want to spend a minute talking about our vision and our top priorities for this year before turning the call over to Jason. Starting with our operating performance. The fourth quarter was in line with our updated expectations, reflecting sequential margin expansion with higher acuity and a slight improvement in payer mix and continued cost controls. Same-store net revenue for the fourth quarter increased 2.1% year-over-year, reflecting a 2.4% increase in net revenue per adjusted admission. Some of our milestone achievements in 2025 were very much the result of focusing on the unique opportunities available in each of our markets. For example, ER visits were up more than 13% in our Knoxville hospitals over the past 2 years following a major investment and ER expansion at Tennova North Knoxville in 2024. The current investment at Tennova Turkey Creek in Knoxville, which will be completed this summer, will add more ER beds to the community and drive even more growth to our Tennessee hospitals. A 20% increase in births, more than 4,000 babies born at Grandview Medical Center in Birmingham, Alabama in 2025 was made possible by a recent $10 million investment in women's services. That is the third expansion of women's services and maternity care services since we opened Grandview 10 years ago. In Carlsbad, New Mexico, more than 450 inbound transfers, a nearly 35% increase over the prior year, brought patients into our hospitals for higher acuity care coming from outlying communities as far as 30, 50, and even 100 miles away. And in Longview, Texas, heart surgeries were up 16% in 2025 as we develop a top-notch heart program that keeps patients close to home for high-quality, high acuity cardiac care. These are just a few examples of how we seek to understand and address the health care needs in our communities and invest in our core portfolio for long-term growth. We also made several divestitures in 2025, enabling us to invest proceeds back into our core portfolio or use them to reduce debt. We continue to make improvements to our capital structure with leverage down from 7.4x at year-end 2024 to 6.6x at year-end 2025, thus making materially more value available to our stockholders. And with proceeds from transactions completed or to be completed in 2026, we are creating a path for additional debt reduction and deleveraging, which will further strengthen our balance sheet and continue to improve our capital structure. As we discussed in prior quarters and has been discussed more broadly across our industry, we saw some disruptions in 2025, both from an economic standpoint impacting patient behavior as well as a regulatory standpoint, creating uncertainty in both reimbursement and insurance coverage. We believe these disruptions are temporary and there are plenty of things we can be doing and that we are doing to mitigate risk and ensure we are well positioned for the future. Finally, our vision at CHS is to make the health care experience exceptional for our patients, our communities, and each other. We know this is aspirational, but we also believe it's possible and attainable. To achieve this goal, the health care experience that is exceptional, we have adopted five priorities. We intend to improve quality, physician experience, patient experience, employee satisfaction, and to grow our cash flows, enabling us to continue to invest in additional growth opportunities. We are working to differentiate ourselves in our markets. And we believe doing so will lead to even greater consumer confidence and choice of our health systems, retention of our workforce, growth, and ultimately, enhance financial performance and long-term success. At this point, I will turn the call over to our Chief Financial Officer, Jason Johnson to review financial results in greater detail and discuss our initial guidance for 2026.

Jason Johnson, Chief Financial Officer

Thank you, Kevin, and good morning, everyone. For the fourth quarter, CHS delivered results generally consistent with the expectations. The company continued to execute well on the controllable aspects of the business and was able to deliver expansion in adjusted EBITDA margin on a sequential basis, thus achieving the midpoint of our updated guidance for the full year 2025. Adjusted EBITDA for the fourth quarter was $395 million with a margin of 12.7%. When adjusting for divestitures and out-of-period items, adjusted EBITDA was up slightly versus the fourth quarter of 2024. Same-store net revenue for the fourth quarter increased 2.1% year-over-year driven primarily by rate growth and a slight improvement in acuity as net revenue for adjusted admission was up 2.4% year-over-year. Same-store inpatient admissions and adjusted admissions were each down 0.3%. Same-store surgeries declined 1.9% and ED visits were down 3.6%. When excluding the Pennsylvania operations that were divested on February 1, 2026, same-store admissions and adjusted admissions were flat year-over-year and surgeries were down 0.4%. Meanwhile, CHS again performed well on cost controls. Labor was well managed with growth in average hourly wage rate coming in within our expected range for the quarter and the full year, and contract labor spend was essentially flat on both a sequential and year-over-year basis. Live expense continued to be well managed, declining 110 basis points year-over-year to 14.4% of net revenue in the fourth quarter and down 50 basis points for the full year 2025. Medical specialist fees were $169 million in the fourth quarter, which was up 4.6% year-over-year on a same-store basis and held steady with recent quarters at 5.4% net revenue. We continue to expect upward pressure on medical specialist fees in excess of typical inflation, likely in the range of 5% to 8% growth for 2026 driven by radiology and anesthesia. As we previously noted, we have seen operational improvements in areas such as throughput and safety metrics and physician practices that the company has in-sourced. And we'll continue to evaluate in-sourcing opportunities to combat this upward cost pressure when appropriate. Cash flows from operations were $266 million for the fourth quarter, bringing the full year total to $543 million versus $480 million in 2024. Cash flows from operations for the full year of 2025, as reported includes $169 million in outflows for taxes on gains until the hospitals which are paid out the divestiture proceeds that are reported as investing cash flows. When excluding these cash taxes on divestiture gains, our adjusted cash flows from operations were $712 million for 2025 and adjusted free cash flows were $150 million. As expected, during the fourth quarter, CHS received $91 million in contingent cash consideration related to the 2024 divestiture of Tennova Cleveland and net cash proceeds of approximately $152 million from the divestiture of our outreach lab assets. We used a portion of these proceeds to redeem $223 million of the 10.875% senior secured notes due 2032 at 103% via the special call provision and also redeemed the remaining $14 million outstanding principal amount of the 2027 notes in mid-December. Subsequent to year-end and early February, we completed the divestiture of our 80% ownership in Tennova Healthcare, Clarksville in Tennessee for $623 million in gross proceeds and the three Pennsylvania hospitals for $33 million in cash, plus a $15 million promissory note and additional contingent consideration. We used a portion of these proceeds to redeem another $223 million of the 2032 notes at 103% via the special call provision on February 2. As Kevin previously noted, our leverage at year-end 2025 was 6.6x down from 7.4x at year-end 2024 and has since been further reduced by the second partial redemption of the 2032 notes earlier this month. We have simplified our capital structure by effectively eliminating unsecured notes in the second quarter of 2025. Our next significant maturity is in 2029. And as of December 31, 2025, we had no amounts drawn on our ABL. The previously announced divestiture of our Huntsville, Alabama assets is on track to close in the second quarter and is expected to bring in an additional $450 million in gross proceeds, further enhancing liquidity to fund growth investments and/or further reduce net debt and leverage. It is worth noting that once the Huntsville divestiture is complete, our net debt will be approximately $9.2 billion, down from the $10.1 billion at year-end 2025 and the $11.4 billion at year-end 2024. Now moving on to our initial 2026 financial guidance. We anticipate net revenue of $11.6 billion to $12.0 billion, adjusted EBITDA of $1.34 billion to $1.49 billion, cash flows from operations of $600 million to $700 million and capital expenditures of $350 million to $400 million. The guidance range with net revenue and adjusted EBITDA both coming in below full year 2025 levels reflects the impact of divestitures completed in 2025 and those that have been announced and have been or are expected to be completed in early 2026 as well as the exclusion of one-time or out-of-period items that benefited 2025 results and are not expected to recur in 2026. In bridging from 2025 actuals to 2026 EBITDA guidance, the biggest factors are, of course, the divestitures. For those we completed during 2025, which includes Cedar Park, Lake Norman, and ShorePoint, the partial year impact that you have to take out of our as-reported EBITDA in 2025 is about $30 million to $40 million. For the class of 2026 divestitures, which includes Clarksville, Pennsylvania, and Huntsville, it is about a $80 million to $90 million reduction to the baseline. And then as you recall, we had the retroactive piece related to Tennessee SDP and the opioid settlement, which together added about $45 million of EBITDA in 2025. So after adjusting for all these factors, we view the starting point for '25 as EBITDA of about $1.36 billion. Of that base, our initial guidance range for 2026 reflects core operations of about 4%, which is net of an estimated $20 million to $30 million EBITDA impact resulting from the reduction of HICS enrollment. Our guidance does not include impacts from any new or enacted state-directed payment programs that may still be waiting approval and likewise does not include any benefits from the rural health transformation program as the states in which we operate are still in various stages of finalizing their program designs. Additionally, the guidance considers only the impact of divestitures that have already been completed or announced to date. Any such additional transactions completed during 2026, which would reduce net revenue and EBITDA for the year and the associated proceeds would enable the company to further reduce net debt and leverage. A final note for many employers on a biweekly pay schedule, 2026 will include an extra pay period, meaning there will be 27 payment dates compared to the normal 26 payment dates. CHS is in this category. So while this has no impact on adjusted EBITDA, it will be an approximate $140 million headwind to cash flows from operations in 2026 and is reflected in the guidance range. This concludes our prepared remarks, so at this time, we'll return the call back over to the operator for Q&A.

Operator, Operator

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

Brian Tanquilut, Analyst

Thanks for the information on the bridge. I’ll shift my question to the divestitures. You've announced a few that are pending, which are included in the guidance. How do you view potential further divestitures? Having refined your portfolio, you now have a solid base of hospitals. What’s your general perspective on what remains to be sold, how it affects future performance, and how much more you're willing to reduce the hospital base?

Kevin Hammons, Chief Executive Officer

Brian, this is Kevin. I'll kick this off, and thank you for your question and for joining us today. We are getting, I would say, closer to the end of our programmatic divestitures. We still have some inbound interest as we continue, and probably we'll always have some inbound interest because we have some very good markets. There are a couple transactions right now that we are in some early stages of discussions, but we are not sure yet whether those will proceed or whether we will be able to get those across the finish line. But I would say in terms of what we have interest in selling is certainly dwindling. We're very comfortable with our portfolio as it stands, and we really want to be just opportunistic about transacting hospitals that if there were ever to be a change in the economic environment or environment in which we're operating that would cause us to want to make a decision to divest or if it's just an opportunistic transaction at a price point that would allow us to materially deleverage then I think we would want to take advantage of that.

Brian Tanquilut, Analyst

I appreciate that. And then, Jason, as I think about your bridge that you provided, when I think of the HICS adjustment there, just curious if you could share with us the assumption that you've embedded in that number, whether it's shifting to bronze and employer plans? Or just curious if there's anything you can share with us on that.

Jason Johnson, Chief Financial Officer

Yes. Sure. Thank you for the question. As a reminder, health care exchanges represent less than 5% of our total adjusted admissions and net revenue. And our guidance does take into account the potential impact from the reductions in enrollment in health care insurance exchanges related to the administrative reforms, expirations of enhanced premium tax credits, et cetera. Obviously, it's difficult to predict currently what the ultimate outcome will be, which will be highly dependent upon the ACA plan effectuation rates, potential uptake into the employer-based plans, shifting into lower middle-tier plans, or becoming self-pay. And the success of our company is the eligibility, screening services and assisting uninsured patients with obtaining coverage. We acknowledge that the other peers have, there could be some negative impact to volume trends and payer mix. A 20% reduction in fixed volumes would have resulted in a $100 million to $120 million reduction in net revenue based off of that, where we're kicking off 2025 after excluding the divestitures. And we think that could translate into a $20 million to $30 million reduction in EBITDA.

Operator, Operator

And our next question today comes from A.J. Rice at UBS.

Albert Rice, Analyst

Maybe first, I'd like to ask about the portfolio. It's clearly quite diverse, with midsized city markets constituting a large portion, but there are also several small community properties. Has there been a noticeable difference in performance between these segments of the portfolio? I'm curious if you see significant variations in how the assets have performed over the past quarter compared to last year. Any insights on that?

Kevin Hammons, Chief Executive Officer

Thanks, A.J. We do have a fairly wide range of performance across our portfolio. But as we have trimmed and focused on networks of care, most of those hospitals and even the smaller, more rural hospitals fit within a network that includes a hospital in a larger suburban or midsized metropolitan area. Those smaller hospitals, although individually or on their own may operate at a different level, also serve as an access point or transfer point for higher acuity services that we're still able to capture within the network. So really, as we're looking at and evaluating our portfolio, we've been divesting many more of the hospitals that kind of stand on their own where we don't have a network of care built up around it and focusing our efforts on those networks.

Albert Rice, Analyst

Okay. And then maybe for the follow-up, I know you swung free cash flow positive. Congratulations. It's been a while for that. So that's a good thing. I wonder when you look at that, does that change your view on capital spending, and we certainly are hearing a lot about AI and how hospitals could benefit from AI. What are you doing there? And will that be a focus of spending?

Kevin Hammons, Chief Executive Officer

Sure, I’m happy to address that. Thank you for recognizing our efforts. We’ve been working toward this goal, and I’m pleased to report that we achieved free cash flow positivity this year due to several initiatives, including our divestiture program, which has helped reduce cash interest and alleviate some cash flow challenges. Moving forward, as noted in our guidance, our capital spending levels will remain consistent in absolute dollar amounts compared to the past few years, even with a smaller number of hospitals. This means we will be investing more per hospital going forward, which is possible due to our improved cash flow. These enhancements enable us to invest in additional growth opportunities. Regarding AI, we are already investing in various use cases, some of which are already in use and others on the way. Many of these focus on administrative areas that should deliver cost savings, even within our revenue cycle, such as the appeals process and autonomous coding in prior authorization. We have also introduced AI-augmented tools for virtual patient sitters, which have helped reduce falls and serious safety incidents. On the clinical side, we are rolling out ambient listening and AI virtual assistance to enhance documentation accuracy. Additionally, we are implementing AI-enabled maternal-fetal early warning systems to improve obstetric outcomes. We are exploring these opportunities across our entire portfolio. Furthermore, as we have discussed over the last few years regarding our ERP, the Oracle tools are increasingly integrating AI capabilities for administrative processes that will support our ongoing improvements with our ERP system.

Operator, Operator

And our next question today comes from Ben Hendrix at RBC.

Benjamin Hendrix, Analyst

I wanted to step back to the guidance bridge a little bit and kind of back it up those elements to revenue. Just so we can get an idea of the pass-through provider tax on that one-time Tennessee DPP item and then also profitability of the divestitures. If we could just get the bridge for revenue.

Jason Johnson, Chief Financial Officer

Sure, Ben. Thank you for the question. So I'll kind of walk through starting with the divestitures. For 2025, the partial year impact that again, that's ShorePoint that was divested on March 1, Lake Norman on April 1, and Cedar Park on June 30. It's about $210 million to $230 million of net revenue to take out of 2025. And then for those divestitures that have been announced and have been completed or expected to be completed in early 2026, that's about a $1 billion reduction to net revenue. Keep in mind the three Pennsylvania hospitals that we divested on February 1 generated a lot of net revenue, about $0.5 billion annually, but they were basically breakeven to EBITDA. And then the two one-time items, the Tennessee SDP, the retroactive piece there and the opioid settlement, that was about $60 million in net revenue. So if you kind of factor in all those items, then the jump-off point for 2025 net revenue was about $11.2 billion.

Benjamin Hendrix, Analyst

Great. That's very helpful. And then just in terms of the core growth that you're projecting, if we think about the consumer confidence issue that Kevin raised on his prepared remarks. How are we thinking about the impact there of that kind of early year mix shift and how it could impact the pacing through the year?

Kevin Hammons, Chief Executive Officer

Ben, this is Kevin. Yes. So coming out of 2025, we saw a dip in consumer confidence in December, down to the level that the last time we saw that, I think, was in March of 2025. And following that, we had kind of a pretty soft quarter in terms of volume. So starting off the year, I think you're going to see a little bit of headwind, not only with the reset of co-pays and deductibles, but consumer confidence being light. We do think that's temporary. We think that will improve throughout the year. As I think about kind of cadence throughout the year, although we don't give quarterly guidance, I would expect the back half of the year to be a little stronger than the first half of the year in terms of EBITDA production.

Operator, Operator

And our next question today comes from Jason Cassorla with Guggenheim.

Jason Cassorla, Analyst

Great. Maybe just going back, you noted the exchange headwind on EBITDA to be $20 million to $30 million. I guess if you were just to back that out, you're suggesting close to, call it, like 6% same-facility EBITDA growth for the remaining business. Can you walk us through that growth rate? Is that more in power flow-through? Is that favorable Medicare rates? Just any thoughts there when you kind of back out the exchange in the remaining business would be helpful.

Jason Johnson, Chief Financial Officer

Sure. Thanks, Jason. The kind of pure rate increase assumption there is about 2.5% to 3.5% of the growth. And the remainder is the mix of payer mix, acuity, and volume to get to that, but sort of about 5.5%, 5.3% increase.

Kevin Hammons, Chief Executive Officer

Yes, I might just add, if I can jump in with some color too, if you think about Medicare rates this year, we're looking on the inpatient side, about a 4% Medicare rate increase for 2026. That's the highest rate we've seen or the highest increase we've seen in Medicare for as long as I can remember. So that's going to be helpful that will help drive. We did see some pretty good rate increase in the fourth quarter that Medicare inpatient rates went into effect on October 1. So we do think that will pull through, and as well as some of the capital growth investments that we've made throughout this past year will also be helpful in driving some higher acuity services and some payer mix improvements.

Jason Cassorla, Analyst

Great. Very helpful. And maybe just a follow-up on the divestiture front. I mean, your hospital footprint is down about a third, right, since 2019. I guess as you evaluate the future deals or opportunities, like how are you factoring any potential headwinds that may come from fixed cost leverage leakage as your facility base gets smaller? Just curious how you're thinking about that and how you're factoring that as you look to perhaps sell more assets?

Kevin Hammons, Chief Executive Officer

Yes. We keep a close eye on our overhead costs here. And I think our overhead costs, we've been very efficient with those costs. Many of our centralized services are volume-related, like revenue cycle, like our new shared business center where we've moved accounting, finance, HR. Now that we've put in a new ERP, all of those things can be flexed because they're transactional-related. So as we divest facilities and reduce the number of transactions we're processing, we can scale those accordingly. Also, keep in mind, we've been adding significant numbers of beds to our existing hospitals, even though we've been divesting some hospitals with our capital projects over the last several years. I think over the last maybe 3 to 4 years, we've added 500 to 600 beds to our core portfolio. We're adding freestanding EDs, surgery centers, clinics, and we would continue to be looking at opportunities to do that. If you go back to 2019, our net revenues, I think, were approximately $13 billion. And to your point, we've sold about 35% of our portfolio but our net revenues this past year were $12.5 billion. So that's kind of how we're looking at it.

Operator, Operator

And our next question today comes from Josh Raskin at Nephron Research.

Joshua Raskin, Analyst

I just wanted to go back to that technology agenda that you're talking about. And maybe if you could give a little more details around some of the system changes, the ERP and how that's gone? And where you're targeting more additional efficiencies and savings in light of some of the divestitures. And then I'm curious, any new efforts around revenue optimization or anything else on the revenue side?

Kevin Hammons, Chief Executive Officer

Thanks, Josh. The ERP implementation and transformation, I would say, went extremely well. It was a multiyear process and one that was a big heavy lift for us as an organization, but we did complete that on time. And we fully went live across the entire portfolio effectively January 1, 2025. So we've been up now for a full year on the new systems. They are working as designed. We did not have any issues in terms of closing our books or any expense issues that were of a surprise or that got identified as often is the case when you go through a big system conversion like that, you find things, and we did not find any big surprises. We are still in the process of what I would call maturing the new system. We've had some big successes. According to our tracking, it has saved us approximately $50 million this past year. And I think there's runway over the next couple of years for us to continue to increase the savings as we get out of that. Now those savings have come from a couple of different areas. One, it's been reducing the number of other systems. So we've replaced multiple systems, multiple financial platforms with a single platform. And as we get rid of some of those duplicative systems, we're saving money. We are getting better decision support. We have better insights now that we have a single integrated system and standardized data across the entire enterprise. So we're able to see more, for instance, in the supply chain area. We have a single item master across the entire enterprise, and picking an item that you purchased gives us almost instantaneous visibility into how many of those items are purchased across the entire system as opposed to trying to cobble together multiple systems to see what we purchased of a single item. So that all provides better decision support and allows us to leverage our scale better. And as that whole process matures, we believe we'll be able to extract more savings going forward. Then with the AI components that are baked into the new platform and that are being rolled out, a lot of this AI was not in Oracle when we initially acquired and began implementing it. But as Oracle is building out their product and now that we're in a cloud environment, we get updates every quarter with new functionality. They're rolling out new functionality that we can then take advantage of going forward. That will allow us to gain significant efficiencies that I would expect in 2026 and forward.

Joshua Raskin, Analyst

Perfect. And anything new on the revenue side from a tech perspective?

Kevin Hammons, Chief Executive Officer

Yes. On the revenue side, we are continuing to implement AI in our appeals process and in some autonomous coding. We are exploring additional use cases to further enhance those products. The software we are using in our revenue cycle is also being upgraded, and the vendors are incorporating AI technology or components into their products that we will be able to utilize. This should assist us with charge capture and prior authorization.

Operator, Operator

And our next question today comes from Andrew Mok with Barclays.

Andrew Mok, Analyst

Wanted to follow up on the ACA headwind, the $20 million to $30 million EBITDA call out strikes me as a bit low on a potential $100 million to $120 million impact to revenue. So can you help us understand the offsetting factors there and whether that headwind figure is net of any planned cost reductions?

Jason Johnson, Chief Financial Officer

Yes. Sure. So, the deductibles and co-pays that those patients have are generally not collected by us. The $20 million to $30 million estimate started from our usual 12% EBITDA margin. However, realizing that some fixed costs remain, we adjusted to the $20 million to $30 million range because you don’t incur those costs if patients don’t present, including expenses for supplies, salaries, and so forth.

Kevin Hammons, Chief Executive Officer

Yes. I would just add on to that, and I think Jason brought up a very good point, that our experience has been that a number of the utilization of health care exchange patients is in the ED, and oftentimes those individuals do not pay their co-pays and deductibles. Our collection of co-pays and deductibles is very low in that group of patients. So factoring that in, we don't believe that there is as big a headwind for that business being lost.

Operator, Operator

And our next question today comes from Steve Baxter at Wells Fargo.

Stephen Baxter, Analyst

Not to belabor the exchange points too much. I guess I'm just trying to understand a little bit better. On one hand, I think everyone kind of understands that this exchange population does feel like there is a great deal of ER utilization happening. I guess I'm just wondering, when you think about sort of the decremental margins here, just philosophically, it seems like in a lot of these situations, you might actually keep the cost, people continue to use the ER but just don't actually have the revenue anymore associated with that. So just trying to understand, I guess, why you wouldn't see a much potentially higher decremental revenue drop through on that? And then maybe just to help kind of square it, like what percentage of the exchange enrollment loss do you assume goes to other covered sources?

Jason Johnson, Chief Financial Officer

I'm sorry, I didn't catch the last part of that.

Kevin Hammons, Chief Executive Officer

Yes, the last part was what percentage do you expect to...

Stephen Baxter, Analyst

Yes, like if you expect the exchange market to shrink 20%, like of that shrink, how much of that do you think ends up in another source of coverage? Therefore, like what percentage of this starting 100 to 120 just kind of does not an issue to deal with at all. And then of what's left, that's kind of what the question on the avoided cost and the decremental margin comes in?

Jason Johnson, Chief Financial Officer

It's a bit too early to accurately predict what will happen with these individuals regarding their ability to pay their premiums or whether they might downgrade, go self-pay, and lose coverage. We didn’t try to determine the exact amount likely to return, as it's ultimately less than 5% of our net revenue. We began by sizing it from that perspective and then considered starting with 20% to assess what margin could potentially flow from that.

Kevin Hammons, Chief Executive Officer

Yes. We think we're generally relatively low margin on that business to begin with. And to your point, some of those folks that lose or drop out of the exchange will actually come back with commercial coverage that we'll get a better margin on as they're commercially covered. Some of them may move into Medicaid, some of them may move into uninsured status. We took a blended rate of 20%. But as we think about, given the fact that a lot of the co-pays are not collected, our current margin on that business is pretty low. So that's where we came up with a 20% to 30% EBITDA hit on that revenue.

Operator, Operator

And that concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Hammons for any closing remarks.

Kevin Hammons, Chief Executive Officer

Rocco, thank you, and thank you, everyone, for joining the call today. I want to close by reiterating my thanks for our team members for their commitment to our shared vision for CHS and their combined efforts in putting our values into action. If you have additional questions, you can always reach us at (615) 465-7000. Have a good day, everyone.

Operator, Operator

Thank you, sir. And that concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.