Community Health Systems, Inc. (NYSE:CYH) Q4 2023 Earnings Call Transcript
Community Health Systems, Inc. (NYSE:CYH) Q4 2023 Earnings Call Transcript February 21, 2024
Community Health Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Community Health Systems Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions]. I would now like to hand the call to Anton Hie, Vice President of Investor Relations. Please go ahead.
Anton Hie: Thank you, MJ. Good morning, and welcome to the Community Health Systems Fourth Quarter and Year-End 2023 Conference Call. Joining me today on this call are Tim Hingtgen, Chief Executive Officer; Kevin Hammons, President and Chief Financial Officer; and Dr. Miguel Benet, Executive Vice President of Clinical Operations. Before we begin, I must remind everyone this conference call may contain certain forward-looking statements, including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our annual report on Form 10-K and other reports filed with or furnished to the SEC.
Actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements. Yesterday afternoon, we issued a press release with our financial statements and definitions and calculations of adjusted EBITDA and adjusted EPS. We've also posted a supplemental slide presentation to our website. All calculations we will discuss exclude gain or loss from early extinguishment of debt, impairment expense as well as gains or losses on sales of subsidies gained from the Core Trust transaction, expense from government and other legal matters and related costs, expenses from business transformation costs, expenses related to employee termination benefits and other restructuring charges, and changes in estimates for professional claims liability related to the [indiscernible] locations.
With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.
Tim Hingtgen : Thank you, Anton. Good morning. Thank you for joining our fourth quarter and year-end conference call. To kick things off, I first want to recognize the more than 60,000 dedicated employees, providers and leaders across our healthcare systems for the excellent care delivered to patients in 2023 and always. I'd also like to acknowledge the tremendous team effort that enabled progress in every key priority established for 2023, which we have reviewed on these calls over the past several quarters. Throughout the year, we were purposely focused on advancing safe quality health care, strengthening our workforce, accelerating growth and controlling expenses. Major accomplishments in the year included volume gains across all key services as we continue to see broad-based strength in demand.
New access points, strong capacity management, defined workforce initiatives and investments to optimize our competitive position, make this growth possible. Same-store admissions increased 3.5% in 2023 and adjusted admissions were up 5.3%, driving same-store net revenue growth of 4.8%. Same-store ER volume grew 1.1%, while surgeries increased a solid 5.1%. Adjusted EBITDA for the full year increased 12.3%, and our margin expanded 100 basis points year-over-year when excluding the positive impact of pandemic relief funds in 2022. When you consider a more than $200 million unanticipated increase in medical specialist fees and medical malpractice expense with a 150 basis point impact to margin, we view this performance as a clear sign of positive momentum.
We continue to invest in our core markets to accelerate growth prospects and further capture market share. In Knoxville, Tennessee, construction of our new tower is nearly complete with the grand opening scheduled to take place in the next few months. This project includes new inpatient beds and an expanded emergency department. On the Alabama Coast, the major expansion of our Baldwin County campus should open before the end of the year and will also increase the number of acute care beds and the surgical capacity available within this very busy hospital. While we pursue bed additions where we are seeing strong demand and our growing market share, we also continue to invest in outpatient access points, such as ambulatory surgery centers, freestanding emergency departments, urgent care centers and provider clinics.
As a result, CHS health systems are capturing patient care that is migrating out of the inpatient environment with 54% of our net revenues now derived from outpatient care. This outpatient focus includes the deliberate broadening of our ASC footprint. During the fourth quarter, we completed the expansion of the Grand View GI ASC in Birmingham, Alabama, and completed an ASC acquisition in La Porte, Indiana. And already this year, we opened a de novo ASC in Cedar Park, Texas. In addition to capital investments in our health systems, our transfer center is driving volume and higher acuity admissions, most notably in cardiology, critical care, GI and general surgery. The transfer center also gives us visibility to see where we have opportunities to invest in further service line development and physician recruitment.
Work to sharpen our portfolio in 2023 included divestitures in West Virginia, Arkansas, Oklahoma and Florida. As you may have seen, the FTC recently sued to block our planned divestiture of 2 hospitals in North Carolina to Novant Health. We are limited in what we can say at this point, but we believe this divestiture is appropriate and in the best interest of the community. The case will now move to Federal Court for final determination. Proceeds from divestiture transactions enable a variety of positive activities such as targeted investments in core markets, funding potential future acquisitions and increased flexibility in debt management. We are currently evaluating inbound interest for a handful of markets that could yield more than $1 billion in additional proceeds.
We have modeled several attractive scenarios, but will remain extremely disciplined in our decision-making as it relates to divestitures, acquisitions and ensuring that our core portfolio is strong and positioned for long-term success. In an effort to strengthen our workforce in 2023, our centralized clinical recruitment team continued to deliver strong results, and we finished the year with a net gain of more than 1,000 bedside nurses. We also expanded their activities to Allied Health, building 1,500 physicians in clinical support, technician and other roles. The impact was real, with the $260 million reduction in contract labor in 2023 compared to the prior year. Also, as you know, in 2023, we've rapidly and successfully in-sourced a large number of hospitalist and emergency medicine programs that were previously vendor outsourced.
As a result, we now operate an internal infrastructure of resources that allows for further integration of hospital-based physician groups required by our markets. Based upon the success of in-sourcing ED and hospitalist medicine initiatives are underway to in-source anesthesia services in select markets, and we believe we can scale these new capabilities effectively and as needed. Advancing safety and quality is an ongoing daily commitment. In 2023, we achieved a record 89% reduction in our serious safety event rate from the baseline established more than a decade ago. We saw many other measures of quality care success including a 25% reduction in the overall mortality rate and a 48% improvement in postop respiratory failure rates. Looking to the future, our recently announced clinical data platform migration and partnership with Google Cloud opens the door for expanded use of AI and demonstrates how CHS is leveraging technology to drive administrative efficiencies and to improve patient care.
Dr. Benet is on the call with us today to comment about the ways we are and will be using AI and machine learning across our hospitals. Dr. Benet?
Miguel Benet : Thank you, Tim. Our partnership with Google Cloud enabled us to unify our data into a single platform that facilitates greater transparency, enables more real-time decision-making and that will serve as the foundation for the future use of AI in our health care settings. We call our platform THIA, or tactical health engine for intelligent analytics. Working on this platform, we are developing tools that improve patient care and outcomes and that support our clinicians and administrative teams in their work. As we leverage AI, we expect to drive efficiencies that enable our health care professionals to focus even more of their time on high-value patient interactions. For example, we can deploy this technology for continuous monitoring of patients in the acute care setting using algorithms and near real-time data to identify the potential need for early intervention.
AI can be used to generate clinical summaries that physicians and nurses can edit for documentation, decreasing administrative work. Since AI can do still and disseminate large amounts of complex data, we anticipate using it to help our clinical documentation specialists, capture the complexity of care and documentation. Another example is our ability to provide patients with concise contextualized information to improve social determinants to help by using Google Maps capabilities to provide discharge patients with a list of nearby resources available in their communities and customized to their needs. We are already seeing notable benefits, including improvements in a variety of quality metrics and operational benchmarks such as reductions in mental state.
There are endless possibilities, and we are just beginning to see the power of artificial intelligence and health care. In all, we are doing at CHS, we are following standards set in 2018 for ethical, safe and proper use of AI and have joined the coalition for Health AI to help frame safe and responsible use of AI in health care into the future. Tim, I'll turn the call back to you.
Tim Hingtgen : Thank you, Dr. Benet. Our fourth overarching priority remains controlling expenses, which Kevin will address in his remarks, along with other comments about our financial performance in the fourth quarter and 2023 and our outlook for 2024. Kevin?
Kevin Hammons : Thank you, Tim, and good morning, everyone. Overall, we were pleased to see continued solid demand in our markets and CHS' ongoing progress on our strategic priorities. For the fourth quarter, net operating revenues were $3.2 billion, representing year-over-year growth of 1.2% on a consolidated basis. On a same-store basis, net revenue was up 4.1% over the fourth quarter of 2022, driven primarily by a 3.6% increase in adjusted admissions and a 0.5% growth in net revenue per adjusted admission. Inpatient and outpatient volumes in the fourth quarter increased for both the commercial and Medicare books, reflecting the strong demand in our markets and targeted capital investments. However, the mix of that business with the disproportionate growth in Medicare Advantage versus fee-for-service and from states where our negotiated commercial rates are lower, continued to affect our net revenue per adjusted admission growth, similar to previous quarters.
Adjusted EBITDA for the fourth quarter was $386 million, representing a margin of 12.1%. During the quarter, we benefited from the recognition of approximately $40 million in increased EBITDA from the Mississippi Hospital access program, of which approximately half related to prior periods. While this amount was not factored into our guidance, we effectively offset this benefit by increasing our self-insurance reserves for medical malpractice, which was recognized as a change in estimate during the fourth quarter. We believe this adjustment was appropriate based on recent experience and claims activity across the hospital industry. Overall, we were pleased with our performance on labor costs. Average hourly wage rate for the quarter was up approximately 3% year-over-year, bringing the full year increase to approximately 4% versus our full year expectation for 5%.
We expect similar growth in average hourly rate in 2024 of approximately 4%. As Tim noted, our recruitment retention strategies have helped stabilize our workforce, allowing us to drive significant reductions in contract labor expense, which at $52 million represented an approximate $30 million decline over prior year and a modest decline sequentially. Recall that we typically see a material increase in contract labor utilization in the fourth quarter to help cover for seasonally higher patient demand. Meanwhile, medical specialist fees at approximately 5% of net revenue remained elevated versus historical levels, but generally consistent with the third quarter. When comparing the gross up of expenses for physicians in-sourced, from the former APP contract against the net revenue related to those physicians, we estimate that our results benefited by approximately $5 million during the quarter versus the subsidy payments previously paid to APP.
We expect further opportunities in the coming quarters as we look to scale our in-sourcing efforts, but believe there continues to be pressure, particularly in the area of anesthesia. Cash flows from operations were $90 million for the fourth quarter of 2023 compared with $9 million in the year ago period. We did not see the expected improvement sequentially in accounts receivable, primarily from the temporary billing delays that we discussed last quarter related to clinical system upgrades and our physician in-sourcing initiative. Additionally, performance for the quarter was affected by growth in the Mississippi supplemental Medicaid program, AR of approximately $40 million. The slowdown of receiving payments from Medicare Advantage payers versus fee-for-service of approximately $10 million and the acceleration of interest payments resulting from our refinancing efforts of approximately $30 million.
Note that we've begun receiving payments in the first quarter from the state of Mississippi for the expanded Medicaid funding program and expect significant further improvement in cash flows relative to where we finished 2023. Capital expenditures for the quarter were $110 million, bringing the full year total to $467 million, consistent with our guidance of $450 million to $500 million. In December, we completed a private offering of $1 billion of 10.78% senior secured notes due 2032. Using proceeds from the offering, and from the completion of our Bravera divestiture to redeem $985 million of our 8% notes due 2026 and to extinguish $402 million of principal amount of other debt, which by capturing discount resulted in a pretax gain from early extinguishment of debt of approximately $72 million during the quarter.
Net debt to trailing adjusted EBITDA at year-end was 7.88x slightly improved relative to the third quarter. We remain well positioned to meet our needs going forward with improved operations, and $637 million of borrowing capacity under our ABL. As Tim noted in his remarks, apart from the North Carolina transaction, we are currently evaluating opportunities for further divestitures across a handful of markets that could total more than $1 billion in additional proceeds. We anticipate that 1 or more of these transactions could close within the calendar year, providing substantial capital for the company to redeploy. Project Empower, our enterprise modernization initiative launched October 1. And after standing up our shared services platform and new workflows at 15 of our facilities with no disruption in patient care, we are seeing improved visibility and insight as expected.
After a pause during the year-end closing process, we will begin further implementations throughout 2024. Moving on to our initial guidance for 2024. We anticipate net revenue of $12.3 billion to $12.7 billion, adjusted EBITDA of $1.475 billion to $1.625 billion and cash flow from operations of $500 million to $650 million. When normalizing for the divestitures completed in 2023, the midpoint of our net revenue outlook represents a year-over-year growth of approximately 4% and the midpoint of adjusted EBITDA represents a growth of approximately 9%. Note that our outlook does not include the impact of any future divestitures or major acquisitions [indiscernible] does not include the impact of any debt refinancing transactions and excludes the potential benefit from a rollback of the 163(j) limitation on interest deductibility for tax purposes and the income tax refund that we have previously discussed.
Additionally, our cash flow guidance includes approximately $60 million to $80 million of cash outflow related to Project Empower. As the ERP and workflow modernization rolls out to the markets throughout 2024, these investments will wind down by year-end and will become a cash flow tailwind into 2025. [Health] provide context for the 2024 adjusted EBITDA guidance relative to 2023 and 2022. There are several puts and takes that we would like to highlight. Specifically, as we set initial guidance this time last year for 2023, we had anticipated adjusted EBITDA growth of approximately 7% at the midpoint. At that time, the primary expected headwinds were the $173 million reduction in pandemic relief funds and a moderate increase in medical specialist fees, which we were able to offset through the benefits of our margin improvement program, contract labor reductions and growth in patient volumes.
What we had not anticipated as we started 2023 was that medical specialist fees would spike as high as they did midyear prior to our APP transaction and that we would face additional headwinds from higher medical malpractice expense and from the outsized growth in Medicare Advantage, as we have discussed in quarterly calls since then, leading to the results you see today. Looking into 2024, we have much better visibility into these factors, while at the same time, we anticipate tailwinds from growth capital projects over the past 2 years, further reductions in contract labor, additional savings from cost control efforts and a full year's benefit from the recently expanded Mississippi Medicaid funding program. Based on these factors as well as operating results through the first 6 weeks of the year, we have a high degree of confidence in our ability to deliver on the guidance we have provided and look forward to providing updates in the coming quarters.
Tim?
Tim Hingtgen : Thank you, Kevin. I think now we're ready to open up for Q&A.
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