Community Health Systems, Inc. Q3 FY2025 earnings call

• Kevin thanked the team for support during leadership transition and visited markets to engage with hospital teams.
• Third quarter operating results: net revenue up 6% y-o-y, payer mix improved, inpatient volume growth, expense management driving margin expansion.
• Made targeted investments in key markets: capacity/service line expansions, physician recruitment.
• Improved capital structure: leverage reduced to 6.7x from 7.4x at year-end 2024; refinanced $1.743 billion of Senior Secured Notes due 2027 with 2034 notes.
• Received $91 million contingent cash consideration from Tennova Cleveland divestiture; expected divestiture of outreach lab asset closing with ~$195 million proceeds.

For the third quarter, Community Health Systems' adjusted EBITDA was $376 million, compared with $347 million in the prior year period, with a margin of 12.2%, increasing 100 basis points year-over-year. Excluding the $28 million legal settlement gain, adjusted EBITDA was $348 million and margin was approximately 11.4%, up 20 basis points from the prior year period. Same-store net revenue increased 6.0% year-over-year, driven primarily by rate growth as net revenue per adjusted admission was up 5.6% year-over-year. Same-store inpatient admissions increased 1.3% year-over-year, and adjusted admissions were up 0.3%. Same-store surgeries declined 2.2% and ED visits were down 1.3%. Medical specialist fees were $165 million in the third quarter, up approximately 4% year-over-year on a same-store basis, representing 5.4% of net revenue when excluding the legal settlement.

• Updated 2025 adjusted EBITDA range to $1.50 billion to $1.55 billion, considering legal settlement benefit not in prior guidance.
• Confident in achieving positive free cash flow for 2025 after adjusting for cash taxes on divestiture gain.
• 2026 considerations: Medicare rate increase, potential SVP programs, growth investments, and impact of prior divestitures.

• Macro-economic factors affecting consumer confidence and outpatient volumes.
• Inflationary pressures and potential upward pressure from tariffs on imported products and raw materials.
• Impact of Medicaid eligibility changes in states like Indiana, though no significant impact seen yet.

Q: Congrats on the quarter. Maybe, Kevin, as I think about volume performance, obviously, nice to see the positive trend in inpatient. But on the outpatient side, you still saw some weakness in surgeries and ER. Just any thoughts you can share with us in terms of what you're seeing in terms of the recovery of volumes there? Or how are you guys thinking internally in terms of what that trajectory looks like? And maybe also the components of what outpatient is, and what you're seeing in those buckets?

A: Thanks, Brian. Absolutely. So as we called out in the second quarter, and as I believe we still saw in the third quarter, some of the economic headwinds, more the macroeconomics, the climate and consumer confidence seems to be the big headwind. And I think that continued on into the third quarter, particularly in some of our markets are experiencing some heavier or more softness economically than other markets. . And so we still believe that has been the primary driver of some of the softness now. As consumer confidence seems to be stabilizing, it's bounced off its lows in the second quarter a little bit and seems to be improving. We are seeing some recovery, and I think that we experienced that where we saw some improvement in payer mix into the third quarter, and we're certainly experiencing that in some of our markets. So that gives us a little more confidence as the payer mix improves and people are feeling better. They're starting to come back in for more procedures. Our -- although we were still down on an outpatient elective surgery volume year-over-year, it was improved over second quarter. So we did see some improvement there. I'd also point out maybe that the immigration climate probably is affecting some of our markets still if you think about markets in Arizona, across Texas, primarily, there's still probably a little bit of an overhang there where patient behavior, people are staying away from hospitals, at least on an elective basis more than we've seen in the past. Now we're also experiencing, or noticing that, in our ER business. And many of those are uncompensated. So where you're seeing some lower volume and maybe why that hasn't completely been noticed in our EBITDA generation is because some of that volume that we're seeing lots of volume, particularly in the ERs and uncompensated care. And so that has not had an EBITDA -- negative EBITDA impact on it.

Q: How should we be thinking about your divestiture kind of plans or outlook for 2026?

A: Yes, we're still pursuing. Some divestitures were in some early conversations that -- it's too early at this point. We don't know how far those will go. But certainly, we're continuing to get some inbound interest. We are in some more advanced discussions on a couple of deals, which we think could be announced even later this year. But no agreements have been signed at this point. So nothing to report today that we are advancing some discussions...

Q: It sounds like you think you'll be free cash flow positive on a full year 2025 basis, assuming the fourth quarter comes in with a couple of hundred million positive for you. Is that -- as you begin to move to a position where that's ongoing going to be the case. Does that change your thinking on capital deployment, amount of CapEx you're going to spend, other initiatives, maybe tuck-in deals with outpatient or other things? Any thoughts on that?

A: Thanks, A.J. Absolutely, I think that it frees us up a little bit and does allow us to think, and be a little more strategic in terms of how we think about either deploying capital. It gives us some optionality of whether we use incremental free cash flows to further delever the company to -- which in effect would have a virtuous cycle benefit because it reduced future cash flows. We could use it where there are opportunities for some tuck-in deals to spend capital more strategically in areas of things that we think could generate further EBITDA. So it does free stuff and should then again, create a little more of a virtuous cycle for us.

Q: Just a quick question for Kevin and Jason in turn. Just a little bit more color on your early observations in your roles. Kevin, you mentioned you've visited some facilities, any surprises or anything out of expectation in your review of the platform? And then any initiatives you guys are looking at? You talked a little bit already about capital deployment. But anything in operations or balance sheet management that could kind of deviate from your prior practice?

A: Thanks, Ben. I appreciate the question. I think the short answer is to say, I'm really excited about the direction of the company, and I'm confident that we have the right strategies and people in place to execute on our opportunities. We've had a -- I believe, a very smooth transition of leadership. And I believe we're already picking up momentum in a number of key areas. As I mentioned in my prepared remarks, we have taken the time to visit several local health systems. We've met with health system leaders and I think substantially all of our major markets already. They're very enthusiastic about the progress we're making. And I just -- and becoming increasingly confident that our investments, our strategic priorities, and the resources that we're appropriately laser-focused on those most important aspects of our business. I think we'll see some of that come to fruition here in the near term with a few areas. I'm highly focused on quality of care. So our quality, ratings, our patient and physician experience, employee satisfaction, and I won't take my CFO hat on, and I'll continue to be laser-focused on free cash flow and making sure we've made such great progress over the last, probably, 9 quarters in a row on free cash flow trending positively, now that we're getting to kind of cross over from being negative to positive free cash flow. I think that's going to give us a lot more opportunity. So as我 think though about those kind of 5 priority areas for myself and the progress that we're already making on quality and getting focused on the others. I think that will help really accelerate what we can do in the future. Jason Johnson: Brian, this is Jason. Kevin alluded to as CFO hat so. I'm in the position of following the guy who's still here. And Kevin put into place to focus on adjusted free cash flow in that virtuous cycle, and that's -- we're continuing to make sure that we're laser focused on that. So no change there. I do think about that, we got the ERP fully implemented earlier this year. So continuing to optimize that as a big focus. Evaluation of the most efficient use of proceeds from any divestitures, whether that's investment in capital or deleveraging through debt repurchases. So from my standpoint, it's just -- I've been here with Kevin for a number of years. So I understand what his vision is financially and aligned with it and we're continuing on.

Q: I think I want to just follow up on some of those encouraging volume trends. Were those trends you saw exiting 3Q, or at the start of 4Q? And from a category standpoint, what are you seeing? And is the payer mix improvement generally driven more by the employer-based coverage, or the ACA?

A: So we saw the payer mix improvements really beginning early Q3 in July. So the -- we saw that improvement throughout Q3. So I think our expectation would be that, that will likely continue into Q4. Now from a comp perspective, Q4 of 2024 was strong and particularly kind of the post-election period, we saw consumer confidence kind of spike in Q4 of last year. So we will have that to climb over. But all in all, directionally and sequentially, I would say that we should continue -- or we expect that we could continue to see some improvement Q3 to Q4. In terms of where we're seeing improvement in terms of the breakdown? It was primarily in commercially insured business, although we did see improvement in exchange as well. But again, the exchange business is a relatively small component of our overall net revenues.

Q: Just a quick question for Kevin and Jason in turn. Just a little bit more color on your early observations in your roles. Kevin, you mentioned you've visited some facilities, any surprises or anything out of expectation in your review of the platform? And then any initiatives you guys are looking at? You talked a little bit already about capital deployment. But anything in operations or balance sheet management that could kind of deviate from your prior practice?

A: Thanks, Ben. I appreciate the question. I think the short answer is to say, I'm really excited about the direction of the company, and I'm confident that we have the right strategies and people in place to execute on our opportunities. We've had a -- I believe, a very smooth transition of leadership. And I believe we're already picking up momentum in a number of key areas. As I mentioned in my prepared remarks, we have taken the time to visit several local health systems. We've met with health system leaders and I think substantially all of our major markets already. They're very enthusiastic about the progress we're making. And I just -- and becoming increasingly confident that our investments, our strategic priorities, and the resources that we're appropriately laser-focused on those most important aspects of our business. I think we'll see some of that come to fruition here in the near term with a few areas. I'm highly focused on quality of care. So our quality, ratings, our patient and physician experience, employee satisfaction, and I won't take my CFO hat on, and I'll continue to be laser-focused on free cash flow and making sure we've made such great progress over the last, probably, 9 quarters in a row on free cash flow trending positively, now that we're getting to kind of cross over from being negative to positive free cash flow. I think that's going to give us a lot more opportunity. So as我 think though about those kind of 5 priority areas for myself and the progress that we're already making on quality and getting focused on the others. I think that will help really accelerate what we can do in the future. Jason Johnson: Brian, this is Jason. Kevin alluded to as CFO hat so. I'm in the position of following the guy who's still here. And Kevin put into place to focus on adjusted free cash flow in that virtuous cycle, and that's -- we're continuing to make sure that we're laser focused on that. So no change there. I do think about that, we got the ERP fully implemented earlier this year. So continuing to optimize that as a big focus. Evaluation of the most efficient use of proceeds from any divestitures, whether that's investment in capital or deleveraging through debt repurchases. So from my standpoint, it's just -- I've been here with Kevin for a number of years. So我 understand what his vision is financially and aligned with it and we're continuing on.

Q: I just wanted to touch quickly. I think you noted kind of thinking about 2026 and the favorable Medicare IPPS coming in. Obviously, the -- we're waiting on the final outpatient rule. But like as you think about -- if the outpatient were to come in as proposed, like how do you think about the net of those two pieces as it relates to 2026? Were they largely offset each other? Or are there nuances from a Medicare rate perspective if the OPPS comes in as proposed?

A: I would say with the proposed outpatient, but we know an inpatient proposed outpatient, I still think it's a little net positive to 2026 over 2024. Sorry, 2025.

Q: Can you guys hear me?

A: Yes Jason.

Q: Okay. Got it. I just wanted to touch quickly. I think you noted kind of thinking about 2026 and the favorable Medicare IPPS coming in. Obviously, the -- we're waiting on the final outpatient rule. But like as you think about -- if the outpatient were to come in as proposed, like how do you think about the net of those two pieces as it relates to 2026? Were they largely offset each other? Or are there nuances from a Medicare rate perspective if the OPPS comes in as proposed?

A: I would say with the proposed outpatient, but we know an inpatient proposed outpatient, I still think it's a little net positive to 2026 over 2024. Sorry, 2025.

Q: Can you speak to trends from payers around denials and underpayments, maybe just an update there and more importantly, around maybe the mitigation of those pressures? And I'm curious if you're using any external vendors? Or is it all internal services on the RCM side and maybe any changes that have been there through the year?

A: Sure. So we called out really third quarter last year and in 2024, a big spike in denials. And since that time, it's stabilized. It is not really gotten any worse. But we continue to invest in our physician adviser program. We're investing in some AI tools in terms of how we do denials with our internal revenue recycle team. We are using a combination of third-party vendors as well as internally developed products on that for purposes of our revenue cycle team. Our revenue cycle is managed internally with our own team that they do use a combination of products. So as we get better at it, I would say we've been able to kind of hold things stable, which would indicate that the payers are probably also denying more claims, but we've been more efficient or better at overturning some of those denials in order to kind of keep things status quo.

Q: Flu season. It seems like off to a little bit of a slow start. I assume that's contemplated in guidance, and I'd be curious if you guys are seeing any updates into October as we kind of move into flu season?

A: Yes. It is contemplated in guidance, and we haven't seen any big pickup yet in our facilities and the heavy flu. So at this point, I'm not sure we'll -- what we'll see yet for the remainder of the quarter, but we have kind of taken that into consideration.