Q2 2023 Community Health Systems Inc Earnings Call
Participants
Anton Hie
Kevin J. Hammons; President & CFO; Community Health Systems, Inc.
Tim L. Hingtgen; CEO & Director; Community Health Systems, Inc.
Albert J. William Rice; Research Analyst; Crédit Suisse AG, Research Division
Andrew Mok; Analyst; UBS Investment Bank, Research Division
Brian Gil Tanquilut; Senior Equity/Stock Analyst; Jefferies LLC, Research Division
Jason Paul Cassorla; Research Analyst; Citigroup Inc., Research Division
Joshua Richard Raskin; Research Analyst; Nephron Research LLC
Kevin Mark Fischbeck; MD in Equity Research; BofA Securities, Research Division
Michael Andrew Murray; Senior Associate; RBC Capital Markets, Research Division
Stephen C. Baxter; Senior Equity Analyst; Wells Fargo Securities, LLC, Research Division
Presentation
Operator
Good morning, everyone, and welcome to the Community Health Systems Second Quarter 2023 Earnings Conference Call. Please note that today's call is being recorded. At this time, I'd like to hand the floor over to Anton Hie, Vice President of Investor Relations.
Anton Hie
Thank you, MJ. Good morning, and welcome to Community Health Systems' Second Quarter 2023 Earnings Conference Call. Joining me on today's call are Tim Hingtgen, Chief Executive Officer; and Kevin Hammons, President and Chief Financial Officer.
Before we begin, I must remind everyone that this conference call may contain certain forward 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 Securities and Exchange Commission.
As a consequence, 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 have also posted a supplemental slide presentation on our website. All calculations we will discuss on today's call exclude gains or losses from early extinguishment of debt, impairment expense as well as gains or losses on the sale of businesses, expense from government and other legal matters and related costs, expense related to employee termination benefits and other restructuring charges, expense from business transformation costs as well.
With that said, I will turn the call over to Tim Hingtgen, Chief Executive Officer.
Tim L. Hingtgen
Thanks, Anton. Good morning, and thank you for joining our second quarter conference call. We were pleased to deliver both year-over-year and sequential improvements in key operating metrics in the second quarter as we expected, with notable progress in the areas of patient volumes, net revenue and adjusted EBITDA.
We are seeing increasing demand for our healthcare services because of investments to expand in key markets, strong physician recruitment success and other volume-generating initiatives we are well positioned to capture more growth as the year continues. Before I get into the specifics of the quarter, I'd like to touch on 3 strategic developments, which should be very positive for our company.
First, I want to address recent changes that will continue to sharpen and strengthen our portfolio as we remain focused on markets with the greatest potential to produce meaningful long-term growth. To this end, last week, we announced the planned divestiture of Bravera Health. This health care system includes 3 acute care hospitals about an hour north of Tampa. This is a good market, but divestitures like this one and others such as El Dorado, Arkansas, Seminole, Oklahoma and 2 other small health systems in West Virginia enable us to deliberately focus our resources in markets that we deem as most investable and that can produce greater growth and returns over the long term.
Proceeds from the Bravera transaction are expected to be approximately $290 million. At the same time that we are divesting certain assets, we are making significant investments in markets where we see more attractive growth opportunities. We have added nearly 200 beds in key health systems over the past 18 months, and we continue to add outpatient locations such as ambulatory surgery centers and freestanding emergency departments and communities where we have opportunities to gain further market share.
Our new hospital in the Houghton area of Tucson, Arizona just celebrated its 1-year anniversary and is delivering strong operational results and in fact, exceeding its year 1 pro forma. Another de novo hospital that we opened in this market in late 2020 continues to grow and perform very well.
Northwest Healthcare now has the largest overall presence to Tucson covering all quadrants and the fastest-growing areas of the region. We expect similar strong results for major bed tower expansion projects underway in 2 other high-growth markets, Foley, Alabama and Nashville, Tennessee. On the outpatient side of the business, we recently acquired an ambulatory surgery center in Key West, Florida and opened a third orthopedic focused ASC as part of Lutheran Health Network.
Expanding health system partnerships with highly reputable and skilled surgeons remains a very high priority. We will continue to methodically work our development pipeline and invest for the future where we have the best strategic opportunities.
Next, as you likely know, American Physician Partners, or APP, has ceased operations effective July 31, amidst severe financial challenges. APP was contracted for ED and hospital provider services in a number of our markets. As it became likely that APP would not be able to continue operations, our team moved swiftly to transition the employment of more than 500 APP hospital-based providers working in our hospitals to affiliates of our company.
We believe this arrangement with APP accomplishes several things. Most importantly, it presents any disruption to patient care in the facilities where they were the contracted provider. It also strengthens the alignment between our hospital-based physicians and clinical care teams and delivering quality care and strong safety and patient satisfaction scores.
And finally, it mitigates potential future financial risk as we will be in a better position to bring contracts in-house at other facilities where we see opportunity to improve operating performance. While in-sourcing such a large number of programs in approximately 1/4 of our market and all at once was not in our immediate plans, we view this as an attractive opportunity to stand up a scalable in-house solution with long-term benefit for CHS.
While our existing capabilities and physician clinic operations and with the addition of local management talent from APP, we are very confident that we can operate these programs efficiently, effectively and in strong partnership with the providers who have been a part of this transition.
Finally, we are excited to publicly announce Project Empower, a strategic initiative to modernize and further centralize and standardize certain business functions. As part of the program, we will launch our Enterprise Resource Planning or ERP platform later this year. Kevin will go into more detail about how this initiative will optimize a number of business activities and eventually yield meaningful savings to our organization over time.
Returning to our second quarter results, I want to highlight a few of our key performance metrics. Same-store admissions increased by 4.8% and adjusted admissions increased 4.9% year-over-year. Same-store surgeries increased 6.2% with strength across a number of specialties, including cardiovascular, colorectal, urology and gynecology.
In addition to these year-over-year gains, we also experienced solid sequential surgery volume improvement in the second quarter. I mentioned physician recruitment earlier, so I want to highlight that at the midpoint of the year, provider recruitment is up 13.1% compared to last year, which is our -- which was our best recruitment year of the past 5 years.
We are also making great progress recruiting nurses. Nurse hiring for the first half of the year is up 5.3% compared to last year in large measure due to the success of our centralized nurse recruitment model. Through tuition reimbursement, nursing school programs and other opportunities for existing employees to become nurses, nearly 400 of our team members have achieved RN status this year and moved into nursing role and nearly 400 more nurses have joined our hospital team via international recruitment programs.
We also realized a significant reduction in contract labor during the quarter, which Kevin will describe in greater detail. As we move forward through the second half of the year, we will pursue continuous growth and every opportunity to manage costs. We remain optimistic about all of the potential still ahead. Now Kevin, I'll turn the call over to you.
Kevin J. Hammons
Thank you, Tim, and good morning, everyone. As Tim mentioned, we were very pleased with our financial and operating performance in the second quarter. As expected, results reflected notable sequential improvement as demand remains strong, driving continued solid volume trends and better payer mix, and reductions in contract labor helped drive margin expansion.
The continued return in core demand for healthcare services is encouraging, and CHS continues to invest in service lines, access points and talent so that our operators can provide safe and cost-effective care for our communities.
Moving on to quarterly financial results. Net operating revenues were $3.1 billion, representing 6.2% year-over-year growth on a consolidated basis. On a same-store basis, net revenue increased 9.2% from the second quarter of 2022. This reflected a 4.9% year-over-year increase in adjusted admissions and a 4.1% increase in net revenue per adjusted admission.
Additionally, surgeries were up 6.2% on a year-over-year basis. On a sequential basis, same-store net revenue increased 1.1%, driven by 2% growth in adjusted admissions and a 1.7% increase in surgeries, partially offset by 0.8% decline in net revenue per adjusted admission. As noted, we experienced slight improvement in payer mix relative to the first quarter and continue to expect further improvement through year-end.
Adjusted EBITDA was $373 million, representing adjusted EBITDA margin of 12%. Consistent with expectations, pandemic relief funds did not contribute materially to the adjusted EBITDA in the second quarter compared with the $8 million recognized in the prior year period. We were very pleased to deliver strong labor cost management during the quarter with combined salaries, wages and benefits and contract labor expense declining approximately $40 million sequentially.
We achieved these results despite the continued strong nurse and provider recruitment activity and increased staffing necessary to meet the strong demand in the quarter, primarily through productivity management, and improved retention and lowering the need for overtime and premium pay.
Notably, our average hourly wage rate increased only 2.8% compared to the prior year and was down 0.6% sequentially. Contract labor expense showed further progress, down 15% sequentially to $74 million in the second quarter of 2023 and well below the peak of $190 million in the first quarter of 2022.
Supply costs were down $3 million sequentially despite the solid growth in surgical volumes reflecting our ongoing supply chain management efforts. Medical specialist fees were also down slightly from the first quarter, but were still up substantially on a year-over-year basis. We expect further reductions in the coming quarters, particularly through the actions we've taken through the agreement with APP.
Moving on to the cash flow statement. Cash flows from operations were $86 million compared with $53 million in the second quarter of 2022. Capital expenditures for the quarter were $105 million and for the first half of 2023 were $227 million on track with our guidance of $450 million to $500 million.
We continue to expect significant improvement in free cash flow performance with certain state supplemental payments expected to come in along with other working capital improvements. Recall that the fourth quarter has historically been our strongest cash flow period, and we expect this year to be no different.
The company's net debt to trailing EBITDA was 7.7x at quarter end, with $118 million of cash and equivalents on hand and $764 million of borrowing capacity available under our ABL, we remain well positioned from a liquidity standpoint to meet our needs going forward. Proceeds from the sale of our facility in El Dorado, Arkansas, that was completed in July and the planned divestiture of the Bravera Health assets in Western Florida will be used primarily to pay down debt, freeing up additional capital for higher return uses in core strategic markets. From time to time, we continue to receive inbound interest in our assets, and we'll consider a transaction when it makes financial and strategic sense.
Over the past several quarters, Tim and I have discussed our 4 near-term priorities to position the company for long-term success, accelerating growth, strengthening our workforce, controlling expenses and advancing safety and quality. To that end, we are pleased to announce the launch of our enterprise-wide modernization and optimization initiative, Project Empower, which we believe will advance each of these key areas of focus as well as deliver increased shareholder value.
Project Empower encompasses important investments across the operations and financial aspects of CHS, including implementation of an integrated Oracle ERP platform, standing up of a shared business organization and the redesign of key workflows. The program will provide standardization of core processes within finance, supply chain and human capital management, improved transparency across the enterprise to enable more timely decision-making reduced complexity and administrative burden and help CHS better leverage at scale as one of the largest health care systems in the country.
The company has committed significant resources to ensure the success of Project Empower, including both internal and external FTEs focused on implementation and change management experts to help team members adjust to their new workflows. Implementation will occur in several waves, beginning in the next several months and rolling out to the entire portfolio through early 2025. This cadence will allow leadership to learn from the process and ensure that subsequent waves go smoothly to minimize the risk of operational and financial disruption.
Through better management of our supply chain and our workforce, reduce variability in processes and outcomes and enhanced data to support our decision-making to capitalize on opportunities, we anticipate significant cost savings and other financial benefits from Project Empower.
Additionally, we believe this significantly improved visibility and insight may reveal opportunities within CHS' markets and business lines from which our operators can capitalize upon to drive further shareholder value. We look forward to providing updates and progress reports on achievement of key milestones as we press forward with Project Empower in the coming months and quarters.
With that, I'll turn the call back over to the operator to poll for questions.
Question and Answer Session
Operator
(Operator Instructions) Today's first question comes from Brian Tanquilut with Jefferies.
Brian Gil Tanquilut
Congrats on a strong quarter. I guess my first question for you guys on the staffing side, and it's a 2-part right, nursing -- Kevin, I mean how much runway do you think is left to reduce your utilization of contract labor and maybe just overall SWB? And then maybe for Tim, how are you thinking about the physician -- hospital-based physician side? I know there's a lot of disruption there, you called out APP. Any strategies that we should be thinking about that you're contemplating as a way to position for what seems to be a very volatile physician environment in the hospital today?
Kevin J. Hammons
Thanks, Brian. So let me start off with contract labor. We had indicated at the beginning of the year, we expected a 40% to 50% decrease year-over-year in contract labor. And I think we're well on track to meet that with $74 million of contract labor this quarter, down from $150 million last year to down just over 50%.
I think we'll continue to make progress through the remainder of the year and would expect to exit the year something in the low 60s, $60 million to $65 million is where I would anticipate us exiting the year. Beyond that, I still believe there's some opportunity for us to continue to reduce contract labor probably something at this point, I guess, into the low to mid-50s.
I think at that point, it starts to moderate. We are bringing in a higher number of international nurses to fill some of those spots more international nurses than we used pre-pandemic. Of course, they come at a little lower cost.
They also have longer contracts, and we hope to make them full-time employees eventually. So I think that becomes a pipeline for us. I don't believe, we ever get down to the $30 million a quarter pre-pandemic, which represented about 2.5% of net revenue. Right now, we're approximately 5% of net revenue -- or I'm sorry, of salaries and wages. So it probably goes down slightly from here.
Tim L. Hingtgen
Great. Thanks, Kevin. And Brian, I'll take the medical specialist fee question. And as I said in my opening remarks, the movement with APP was rapid, but it's obviously an expense line item that we've had our eye on for quite some time. We called it out in the first quarter had a significant headwind.
And we expected it to moderate in the second quarter, which it did. We would expect that to continue throughout the rest of this year. I'm not being as material of a headwind, but it's slightly elevated over prior year quarters.
The strategies to mitigate that. Some of them are just operationally based in terms of highly efficient operations to reduce waste. Those would be length of stay initiatives, surgery throughput initiatives, ED initiatives, and I believe we do a really good job with that.
We hope through our Project Empower deployment, we'll even have more insights into how we can optimize care delivery, drive high safety and quality, but also take out some of those costs, which obviously, most of them have some physician staffing component embedded into them.
The other thing which we're very focused on, as we said, was in-sourcing capabilities for the company. And in the first quarter, we actually added some in-house competencies around anesthesia operations and management. It's not our intent to in-source every single hospital-based contract across the company. But where there's an opportunity for us to do so if we can't find a good mix or a good partnership in a local market across any hospital-based specialties. We certainly want to have those capabilities embedded in-house.
On the hospital-based medicine and ED side, with APP maneuver this quarter, we have now about 25% of our contracts in-source. So we're going to learn from that, again, be able to scale that where it makes sense for us. But in general, we hope there are operational efficiencies and our ability to partnership with -- to partner with the hospital-based providers, we can really enhance the care delivery.
I do want to point out again, the change out that we had -- rapid change out that we had with APP, it's going really well. No disruption to operations to providers and really just a delight to work with. And we have brought on some really high-caliber talent from the APP organization, which has allowed us to scale this so quickly. Again, we plan to work through this over the next several quarters and leverage it as a core strength for the organization.
Brian Gil Tanquilut
I really appreciate that. I guess my follow-up, Kevin, as I think about the divestitures that you've announced, maybe just for modeling purposes, as we think about 2024, how should we be thinking about the impact of that on revenue and EBITDA?
Kevin J. Hammons
Sure. The El Dorado, Arkansas and other ones were immaterial, the Bravera Health Network, we underwrote that at about a 10x EBITDA price. I would kind of use that similar to what we've been selling other hospitals on average, and you can probably use that to model out '24. We expect it to close in the fourth quarter. So it really won't have a material impact on 2023 as that should be out for the full year '24.
Operator
The next question comes from Ben Hendrix with RBC Capital Markets.
Michael Andrew Murray
This is Mike Murray on for Ben. It looks like payer mix and inpatient mix for the drivers of better revenue per adjusted admission. Could you talk a little bit about the moving pieces here? What drove the inpatient improvement? And then I have a follow-up.
Kevin J. Hammons
Sure. Let me start that. So part of that, I believe, is just some of the recovery coming back from the pandemic. Initially, as patients started to come back, we saw in the fourth quarter, patients were coming back for clinic visits for screenings for diagnostic testing.
We believe that's leading to further care downstream. In the first quarter, we experienced much more disruption from the economy, I think even with that recovery and that we're seeing fewer commercial patients in all of our increased level of business in Q1 was from Medicare Advantage patients who did not have an economic barrier to coming back in the system.
But we saw the payer mix improve as we expected. We think that will continue to improve throughout the year. The biggest improvement, late in the year before co-pays and deductibles reset again. But it's really kind of just some of the downstream impact of recovery that we're seeing some of that business come back into the inpatient side.
Tim L. Hingtgen
Yes. And Mike, I'll add on to that, rather deliberate in our approach here with the build-out of inpatient capabilities. As we mentioned in our opening remarks, we've added a lot of beds in core markets. We've recruited a lot of doctors to help us further round out specialties and advance our service line and our capabilities that tends to drive some case mix improvements.
And then we overlay on top of that the transfer center, which we did mention this morning, but we talk about almost every quarter, that continues to post sequential and year-over-year growth opportunities for us as we add this capacity in those core markets. So we believe those are really key to the game for further advancing in patient acuity and volumes.
Michael Andrew Murray
Okay. And then my follow-up. Obviously, in the quarter, you had pretty good revenue per adjusted admission. You're coming up against some easier comps in the back half of the year. How should we think about growth in the second half?
Kevin J. Hammons
I think we're starting to see some normalization of seasonal patterns as we come back into the back half of this year. We did start to see a strong recovery in volumes in the fourth quarter of last year. So this year, we would have to obviously be stepping over that. I think the comps were much easier really this -- first quarter and second quarter due to some of the disruption from the pandemic in '22.
Operator
The next question comes from A.J. Rice with Credit Suisse.
Albert J. William Rice
First, maybe just to ask about your contract with managed care. I guess, 2 aspects to that, in particular, but any update generally would be helpful. But there was some -- there's been some discussion about seeing rates bump up a little bit to help with the labor challenges. I wonder if you're still seeing that as you contract for the rest of this year in '24?
And then a subcategory of managed care contracting is the public exchanges. And I know that they've grown rapidly, may grow again in their enrollment with Medicaid reverifications. I wondered, can you just comment on the company's positioning with respect to contracting for public exchanges? Or do you feel like you're well covered in the markets you're in? Any commentary there?
Kevin J. Hammons
Sure, A.J., I'll start that one. So in terms of managed care contracting, we're complete with 23 and you have some contracts that are resetting here or did reset on July 1 for the back half of this year. We're probably approximately 50% complete with 2024 contracts as we're working through those to renegotiate.
In '23, we saw about 100 basis point improvement in average rate as we -- as you mentioned and as we push on the payers to help cover some of the increased cost of inflation, increased costs that we're incurring did see a pickup in the rate we're getting. And that seems to be continuing on into '24.
So I would expect that as we mentioned for '23 in that 4% to 6% range. I would expect something similar at this point in '24. At least we don't have anything that would tell us otherwise.
In terms of the exchanges, you're absolutely right. There's been recent reports out that Texas and Florida have some of the highest exchange enrollment, 2 of our biggest states, and we are well covered with contracts in those exchanges.
Albert J. William Rice
Okay. And maybe just as a follow-up, you've got, obviously, a good rebound in volumes. It seems like and we're sort of at least normalizing, if not a little better even. And you're seeing some meaningful improvement on the labor front. And now you've got this Project Empower. I wonder if you put all that together, when you think about a goal for margins looking at EBITDA margin, looking out a couple of years or did it make you say that there's x percentage points of potential margin improvement embedded in the system that you can now go after relative to the current run rate? Or will this help you maintain the current run rate? Any way to think about that?
Kevin J. Hammons
Yes. So we have our medium-term goals out there to get to mid-teen margin run rate. And we certainly are working towards that and believe that these initiatives with like Project Empower, with the recovery of volume and the investments that we're making on the capital side, both in inpatient and outpatient in the tweaks to the markets that we've made will all work towards getting us to those mid-teen margin kind of goals that we have.
Operator
The next question is from Jason Cassorla with Citigroup.
Jason Paul Cassorla
Great. Just in the second quarter of last year, you flagged that 2 of your markets had a disproportion impact on results. Obviously, the 2Q '23 results proved to be much stronger. But just curious how much of an EBITDA lift on a year-over-year basis was due to the improvements in those 2 markets against a better operating trend backdrop for the rest of your improvement? And then I have a follow-up.
Kevin J. Hammons
Yes. We've had some EBITDA lift from those markets, not outsized and still have a fair amount of work to do in those markets. We have stabilized them. We've taken a number of actions, including consolidating some of the hospitals within those markets, closing some service lines, taking out contract labor because we were spending more on contract labor than we were making and had negative margin as a result.
So we've made kind of taking steps to stabilize those markets. It will take us some additional time to continue to grow them, but we are working to that end.
Jason Paul Cassorla
Got it. Okay. And then just piggybacking off a commercial contracting question in a way, I guess, are you seeing heightened scrutiny for managed care, just given the strong volume backdrop this year perhaps higher denials, greater intensity on utilization management techniques, pushing observation status. And if so, when do you see that moderating in the future? Or how would you frame that thing?
Kevin J. Hammons
So we are. I mean I think we saw a little pause by the payers during the pandemic on some of their tactics, if you will, they've slowed down denying claims and pushing on observations as they had fewer claims to pay. But now that as volumes are coming back, we're certainly seeing a higher number of denials and more pressure from the managed care payers.
All that said, we are experiencing better-than-average renegotiated rates with them going forward contracts. So continuing to work with them on things like denials, observations, making sure we're getting paid what we believe is the appropriate amounts, and working closely with them.
Tim L. Hingtgen
And Jason, this is Tim. I'll add on to that. We've mentioned in the past, really fortified our utilization review function here at CHS. We've centralized certain components of that, over made some data. We're now investing in more, I'll say, clinical oversight of the UR function for I think, appropriate placement for claims adjudication, denial management.
So all those things will be coming into our organization here in the next couple of quarters to continue to improve our front-end games so that we can have the strongest relationship possible with the payers on the back end.
Operator
The next question comes from Kevin Fischbeck with Bank of America.
Kevin Mark Fischbeck
I wanted to start off on this Project Empower announcement. I guess we're kind of used to you guys talking about consistent cost savings initiatives over the last 5 plus years. I don't remember there being like a name like this to what you're doing. So just trying to understand is this of a different scale than what you've done in the past?
And then the timing of what you're talking about starting at the end of this year kind of rolling through 2025. When we think about those medium-term margin target, does that mean not much progress on margins next year and then more kind of '25 and '26? Or are there -- is there a reason to believe that it should be somewhat ratable towards that ultimate margin goal?
Kevin J. Hammons
Thanks, Kevin. So a couple of things I'd point to. We have been talking about our strategic margin improvement program that we really formally kicked off in the fourth quarter of 2019, which was putting a lot of discipline around and chasing a number of initiatives over the course of the last several years.
Project Empower really takes that maybe to a new level. It is adding a significant investment into the company in terms of adding some technology around installing a new ERP and putting in Oracle of the entire enterprise is going to remove a number of disparate systems and put all of our data into an integrated platform across finance, supply chain and HR.
That will significantly improve our ability to manage data at a large scale, give us more comparability across the enterprise versus the disparate systems that we and many others routinely work with. The other thing I would point to is Oracle recently purchased -- acquired Cerner and we're a big Cerner shop with more than half of our hospitals on the Cerner clinical platforms.
This has the potential to open up opportunities for integration between those clinical systems and financial systems to further allow us to leverage data in a very new way. This is not just a technology lift though. We're redesigning workflows. We're putting in a shared business operations for a number of these back office functions that will add efficiencies to the process.
So really, I think what we're talking and the reason we're talking about it. One, we're organized around this internally around Project Empower. It's something we talk about internally, and we've organized the company around that, sharing that with you guys as investors and analysts. It is kind of a longer-term play, but we do believe that benefits will start to come. We're kicking off actually implementation here over the next couple of months that will take us probably through next year to fully implement.
And then there's certainly some runway so you start fully realizing the benefit. But being at our margin improvement program now for a couple of years, this effort is really going to extend that runway and allow us to continue to add margin improvement in ways that we couldn't get at the data today into the future for a number of years.
Kevin Mark Fischbeck
And then just thinking about that progression towards that medium-term margin target. Does the timing of this, I mean, it's more back-end loaded next couple of years? Or is there -- is it more kind of ratable as you think about the levers you need to pull to get to that mid-teens EBITDA margin?
Kevin J. Hammons
Yes. So this project, I think, is one of many things that we're kind of investing in to get to our mid-teen margins. Certainly, our capital improvements or capital investments that will improve higher acuity services and bring in more business. Those are not dependent on Project Empower.
Those should drive margins, the return of volume, leveraging our fixed costs are less dependent on Project Empower. Those can come earlier. Project Empower, I think, again, just lengthens the runway that we can continue to improve margins downstream. So that's kind of how we're looking at it.
Operator
The next question is from Stephen Baxter with Wells Fargo.
Stephen C. Baxter
I was hoping you could help us think a little bit about how the American Physician Partners transition is going to impact your P&L. I guess, first, is the revenue contribution from bringing the ER function in-house for these hospitals meaningful? And by comparison, one of your peers talked about consolidating the ER joint venture and suggested it was a breakeven proposition. Is that the right way to think about it for you, too?
And then I guess, finally, I guess, could you talk a little bit about why you would expect some of the physician specialist fee pressure to reduce itself over time? It does feel like some of these challenges are pretty structural. So I'd love to get more insight into what you think the key levers would be over the next couple of years there.
Kevin J. Hammons
Sure. So let me talk about the kind of the P&L impact. So right now, subsidies that we are paying are all running through the other operating expense line, and we've seen those I've been talking about this now for a few quarters, that are continuing to go up.
And we're not getting any revenue relative to their professional fees in our revenue numbers. So those -- increase in medical specialist fees or subsidies are essentially a pure drag on EBITDA. Going forward, by in-sourcing these doctors, we will be able to bill for their pro fees. So we do get some revenue. We'll be adding their wages for those that are employed or other operating expense for those doctors that are on 1099. But the revenue that's generated from their pro fees does largely offset that increased expense.
So it is somewhat of a net zero impact. But then what we're not having to incur is the markup that we're paying a third party for and the subsidy payments when they aren't able to bill, which is -- so we're removing that drag from the EBITDA calculation.
Operator
The next question comes from Josh Raskin with Nephron Research.
Joshua Richard Raskin
I wanted to just get back to a big step down in SWB, both year-over-year and sequentially and understand the contract labor. But just on the base wage rates, it sounds like are you anniversarying some of those increases? Should we be thinking about wage increases getting back to more normal historical levels?
And then just second question is you kind of reposition further the portfolio of assets and get rid of West Florida, et cetera. Should we expect CapEx -- is there an opportunity for CapEx to step down? Or are you really not investing a ton in some of these non-core markets. So we should think CapEx is just being -- it wasn't really allocated to some of these divested facilities, so maybe not a big step down.
Kevin J. Hammons
Sure. So with regard to the salaries and wages, yes, to your point, about anniversarying some of the higher wage increases is certainly on point, we are anniversarying those larger increases that we had last year.
I think last year, second quarter had about 8.5% wage inflation. So we did anniversary that. We are also benefiting from some productivity gains and reducing over time and premium pay as we're adding more full-time nurses and getting rid of some of the contract nurses take some of the pressure off those full-time employees to have to work over time and have premium pay.
And so that's going to benefit. The other component of that, and there's probably a number of moving parts here, but it's skill set and mix, using additional LPMs in some of our team nursing concepts that we've put in place has been beneficial. And a number of our nurse hire and we talked about in the first quarter or new graduates. So bringing in a number of new graduates that obviously come in at a little lower rate than your longer tenured nurses.
So a number of those things in terms of mix have impacted that as well. And then on your question on capital, I think you're right. As we work through some of these divestitures, they do take some time to work through. We've talked about for a couple of quarters, some deals that we were in conversations on, we weren't sure if they were -- would come to fruition.
When something -- when a hospital or market gets on the radar like that when conversations start to become serious, we're certainly maintaining those hospitals, but not investing a lot of additional growth capital in those -- during those negotiations. So I would not expect us to see a big decline in capital investment.
But as we think about which markets we're targeting, we do look and consider kind of the risk of future capital investments in those markets and what the return risk profile looks like. And by divesting some of these, it certainly helps us reallocate what may otherwise have been future capital to other markets where we believe we have a higher growth profile with less risk.
Operator
The next question comes from Andrew Mok with UBS.
Andrew Mok
First, I just wanted to clarify a few items around the outsourced physician staffing costs. Can you put some numbers around the total dollar cost for these expenses today? And are you expecting the absolute dollar cost to decrease on a same physician basis? Or do you simply expect this to be less of a year-over-year headwind in the second half?
Kevin J. Hammons
We've not quantified the exact dollar amounts at this point. We're still working through kind of all the onboarding and working through that. I would say that it's not going to be overly material for the remainder of 2023. And we'll have probably some more clarity that we can give on 2024 if we believe it becomes more material.
Andrew Mok
Great. And then I wanted to follow up on the revenue per adjusted admit. We love to hear how that performed against your own expectations in the quarter, that metric was actually down sequentially even though you called out -- called it out as a soft spot in Q1 and noted that payer mix improved sequentially. So can you help us understand what's going on there with respect to pricing acuity and mix, especially on a sequential basis?
Kevin J. Hammons
Sure. Overall, I think net revenue and EBITDA came in line with our expectations for second quarter. Volumes continue to be strong for us and recovery from the pandemic. And I think even having adjusted admissions and surgeries up over Q1 was a very strong signal. We do believe that there is further room to improve on payer mix. I think the Medicare age population of our mix was down about 100 basis points. Commercial is up 100 basis points.
So a slight improvement, but it is trending in the right direction as that continues to improve further in the back half of the year, it will certainly lead towards a higher net revenue per adjusted admission statistic. We also had CMI, case mix index, acuity was about flat sequentially. We believe that can improve a little bit, and we expect with some of our investments to improve as well in the back half of the year as people are coming in for services and surgeries and so forth before their co-pays reset for 2024.
Operator
This concludes our question-and-answer session. I'll now turn the call over to Mr. Hingtgen for closing comments.
Tim L. Hingtgen
Thank you, MJ. I want to thank you all for joining us today. Before we conclude, I want to thank our physicians, nurses and other clinicians and support teams for all they do to ensure quality care for their patients and also to our health system leaders and those working in our CHS corporate offices for their many contributions.
As always, if you have additional questions, you can reach us at (615) 465-7000. Thank you, and have a great day.
Operator
The conference has now concluded. Thank you for your participation. You may now disconnect your lines.
