Awesome. Yeah, so good afternoon, everyone. I'm Steve Baxter, the healthcare services analyst here at Wells Fargo. So we're very pleased to have Community Health with us this afternoon. So Community is one of the largest operators of acute care hospitals in the country. From the CFO, or from the company, we have CFO, Kevin Hammons. Thanks again for being here. Any kind of opening remarks you want to make, or do you think we should just get right into the-
Yeah. How about we just jump in?
Okay.
That'd be great.
Good stuff. All right. Yeah, so in, you know, kind of thinking about the first half of the year, you guys, at least from the volume side, I think, have seen fairly solid growth. The way I think you characterized it on your most recent earnings call is you felt pretty good about the sustainability of growth, the demand that you're seeing. Just, you know, update on the demand environment would be great, how you guys are thinking about the back half of the year in terms of growth expectations.
So we do believe the volume growth is sustainable. Believe that, you know, in the back half of the year, as we'd indicated.
We'll see some seasonality in the third quarter.
Yeah.
But still growing over prior year, and then looking to have a strong fourth quarter. We do have a difficult comp in the fourth quarter, 'cause last year in the fourth quarter, we really started to see a lot of business recovery, but still believe we'll be, you know, ahead of that, and we'll see continued growth through the end of the year and into 2025 .
Okay. Yeah, in the first half of the year, I think one thing that's jumped out for you and some of your competitors are just that admissions, you know, grew faster than adjusted admissions. Like, as you guys study that more, I guess, what do you think is influencing the faster inpatient growth? And then, you know, separately, would love to get any comments that you have about how you think that the Two-Midnight Rule may or may not be impacting your results this year.
We did see inpatient admissions outpace adjusted admissions in Q1. It returned to a little more normal proportion in the second quarter. Some of that really, I think, in Q1, was a result of fourth quarter of last year, we had really strong outpatient procedures. We saw early in 2023, if I go back a little bit, a lot of the recovery, kind of post-pandemic and post some of the inflationary period, had been in government insured business.
In the fourth quarter of 2023, we started to see more of that insured business, but they had been out of the system for some time, and it was primarily on the outpatient side.
Okay.
So they were coming in for screenings and, you know, your checkups. In the first quarter, a lot of that translated into the higher acuity services and some inpatient admissions from that, which drove the inpatient higher in Q1, relative to the adjusted admissions increase. Second quarter kind of returned to normal, but still seeing a more balanced growth between government patients as well as commercial and patient, commercial patients. So I think we'll continue to see that growth continue through the rest of the year. In terms of the Two-Midnight Rule, our experience has been, you know, we're seeing an increase in shorter stay admissions. But we believe that's largely being driven by some of the work we're doing internally with our physician advisor group, our utilization review group, making sure that we have documentation appropriate to support a dmissions, as opposed to kind of payer behavior. We're still seeing payers, increase denials. We're still seeing a big increase in denials and downgrades by the payers, and I don't believe that that's really what's driving the inpatient.
Okay, so you think it's like a separate improvement in your documentation that's allowing you to realize these payment rates versus the payer really changing how they approach it to, like, you've elevated your-
We've elevated our game internally.
Okay. In terms of, like, how much more you think there might be to go there, like, as you've done this, like, do you feel like: Hey, wow! Like, maybe this is something we could have been doing in the past, and there's other opportunities to do this better? I guess, like, what would those opportunities be?
I do think we've, you know, probably could have done a better job. We, as we've built out our utilization review and physician advisor program, which really supports us, not only are we, you know, reducing the number of self downgrades or self-
Yeah
... You know, internally, but those physician advisors are also in a position to do peer-to-peer reviews with the payers.
Okay.
So that is helpful as well. We started that early, really the first quarter of this year and we're ramping that up and rolling that out to the entire enterprise. We're not quite fully utilized.
All of our facilities are not fully utilizing that, so there's some additional growth in that.
Right.
So I still think there's room into 2025, where that can continue to grow.
Okay.
At least marginally.
Yeah. Okay. And then, yeah, obviously, the exchanges have been a really good growth story in your markets. And I think obviously now the question becomes, you know, to the extent there is any change to, you know, the current subsidy arrangements, what would the exposure look like? If you step back and look at how exchange patients use the system today versus maybe a more traditional, you know, commercial or employer-based coverage, is there anything notable to kind of call out there as you think about what the impacts could be as these people potentially, you know, unfortunately, could be downsizing on the membership side?
We haven't noticed, or I am not aware of any real differences in terms of how an exchange patient utilizes healthcare services versus non-exchange. In some of our states, we don't have complete clarity. Of course, any patient that presents itself, we're certainly not treating any different. Whether they're an Exchange patient or not in some states that they present, you know, for instance, a Blue Cross card for insurance. We're not aware at that point whether it's an exchange program or a commercial program. I would say overall, you know, our markets look a lot like the national averages, at least as an enterprise where, you know, about 7% of the population is covered by an exchange program. So, you know, on the margins, how they utilize services, I don't believe is any different.
Okay. When you think about, you know, your reimbursement rate compared to maybe a traditional employer-type coverage, like, is there a meaningful difference for you, or do you think it's looking close enough that it's not worth thinking about too much differently?
Yeah, we don't look at it. We, we include the exchanges in our commercial book business. A nd I would say that generally speaking, it aligns fairly well, particularly with the Blues.
Okay. And then when it comes to commercial rates more broadly, you know, one thing that's been an obvious positive for the industry is getting better commercial rate in 2023 and 2024 after the big upswing in labor cost inflation that we saw. You know, what's the latest thinking on that as we enter 2025? Do you feel like, you know, you've kind of gotten as much as you're gonna get there, and it's back to normal? Do you still think there are certain payers that you have an opportunity with? Like, what's the latest thinking on how the commercial rates progress into 2025 and beyond?
For 2025, I think commercial rates will continue to increase at the rate we've seen over the last two years. Which is about 100 basis points higher than we had experienced, historically. So I think in that 4%-6%, on average, is what we're looking at for 2025. You know, beyond that, we're not really contracting much, you know, with the exception of contracts. You know, if we have a three-year contract, and we're entering into it, still year. 2025 is still the first year of some of the trailing impacts on inflation. So those rates will stick around from, you know, 2025, 2026, 2027 still. So I think there's a couple year window still of pretty, you know, good rate increases. You know, but you get to kind of new contracts that had that one round of increases that start to expire in 2026. I would expect a little more pressure at that point.
Okay. Another thing we've started to get questions on, you know, a little bit more, which, you know, it's probably a little bit indirect, but obviously, there's been a big improvement in underlying Medicaid profitability. Still, again, probably not like a profitable business line for you guys, but not as negative as it has been. historically, and I guess theoretically, there's less cost shift or revenue shift, I guess, required to fund the overall operation. Do you think at any point that there's a consideration that this could leak into commercial rate discussions, or do you think this is a just a totally separate issue in your mind?
I think it is definitely a separate issue. You know, whether the commercial payers try to leverage that, you know, yet to be seen. We don't see it yet. I think it's a very separate issue. We would certainly approach it as a very separate issue.
Mm-hmm. Okay. And then, you know, Medicaid supplemental payments in general, like I still think that, you know, you sound like you have a couple of things that potentially could be on the come for you. I think like Tennessee and New Mexico would be the most, you know, notable of those. What's the latest you can share with us on both of those?
Yeah. The latest, both states have submitted their programs to CMS. And we're waiting on CMS approval and there, there's no specific timeline for CMS. Our experience has been it's about 90-120 days. Most recently, Mississippi submitted their program in 2023, in mid-September. CMS approved it in late December, and that's probably the most recent one that we would have experience with. But even prior to that, you know, other states that have done it, 90-120 days. So if I think about, Tennessee submitted theirs early June. New Mexico submitted theirs mid-August. I think there's a good chance that those get approved before the end of the year. I'd also point out, you know, it is an election year, and I would expect the current administration would want to take credit for approving these and not let it not take the risk that the next administration gets approval or gets credit for approving them. So, you know our hope is, anyways, that they get approved in the fourth quarter.
Okay. In terms of, you know, the magnitude, I think there's a lot of ways to do the math wrong. Like, have you guys been able to offer anything around like, "Hey, this is what we think each program could be worth at this point?
Yeah, we've not. We've not quantified it publicly, just at the risk of CMS coming back and making changes to the program. You know, they are material to us.
But we've not gone out with anything specific around quantification. Again, just subject to being changed, just don't wanna get out over our skis on that one.
Okay. And then, if these two programs do come through, I guess when you step back and review the states that you're operating in, I guess, how do we think about, you know, what inning you're in for this? Like, I guess, do you think there's an opportunity either for the states that have already made enrichments to their program to go further, or do you have notable states that just haven't really taken a whole lot of action? I guess, how should we think about the, this in totality at this point?
There, there's a couple of states that still have opportunities to be, you know, material for us, if they either pursue an expansion of their existing program, or a new program altogether. Tennessee, for instance, has a supplemental program already. So this is just an extension of their existing program, which also means it will be a little less significant, you know, than, say, a Mississippi-
which didn't have a program as, and it was going all in, all at once. New Mexico does not have a program, so this will be the first program, but other states that have an opportunity, Indiana, Alabama, Arkansas, there, there's, you know, still a lot of work to do.
They're in very early innings in those three states. But those would be the states that either, you know, do not have programs. Arkansas and Alabama do not have programs at all. Indiana has one, but it's not maximized.
And they could get some additional funding. And that's the one that's probably, of those three, the farthest along. But still a ways away. Nothing's been even submitted to the state legislature yet.
But we are working with the state hospital association and having conversations with the governor's office in all three of those states to push- them to move forward with similar programs.
Yeah, I mean, is that generally how, you know, these kind of come about? Is that, you know, you guys help to educate a given state about the opportunity set through the local hospital- administration and lend your expertise to the process?
Absolutely.
That's how they know how to do it?
Yep, absolutely.
Okay. And then, you know, as we step back, you know, obviously, the exchanges are kind of front and center as something that feels like it's politically sensitive, and then there's some range of debate about, like, whether these Medicaid supplemental payments kind of fall into the political bucket or not. As you think about the potential sensitivity of these programs to, you know, a change in administration, I guess, how does the company feel about, like, comfort level that these programs don't go backwards at some point?
Our view is, and I'll take them separately. On the supplemental programs, these programs, again, are being adopted by both red states and blue states. They've survived both administrations, and I think there's very good bipartisan support for these programs. I would not expect there to be any changes, and once the states are getting this money, it's really hard to take it away, and I don't think either administration has much of an appetite to take that type of money away from the states. In terms of the exchange programs, again, you know, the exchanges have been around now, you know, coming up on a decade.
And I think they're pretty embedded. Again, they've survived both administrations. And now, that one, I think it could get rebranded, or, you know, there could be some changes, but at the end of the day, I think, regardless of what they call it, it's gonna be- a very similar program, and I would not expect there to be a material impact from that.
Okay. And then to shift gears a little bit, you know, the Medicare rate proposal, you know, came out, you know, a couple of weeks back. You know, we thought that, you know, it's obviously a little bit more difficult to compensate some of the DSH and uncompensated care changes. But, you know, we thought it was a pretty healthy rate for your company. We thought something in the order of, like, mid-single digits. You know, what do you guys see when you look at the inpatient rate? And anything, you know, particularly focused on, you know, positive or negative inside that rate?
It is a better rate than we got this year. and better than we've got in the last several years. Probably one of the better rate increases we've seen. I think you know something you know in the mid-single digits. We've not completely finished our math. Still working on some of that, with some of the wage index changes that are also going into that formula, in addition to the DSH settlements and other adjustments. But we think it's a positive change. This past year, in 2024, we were about 2.8%. on a net basis. Increase in 2023 is 1.9%.
We saw a nice lift in 2024. I would expect 2025 to be better than we've received in 2024.
Okay. And, you know, I guess the good news is the first question I asked you today wasn't about labor. Like, labor obviously become seemingly a little bit of an easier topic for you know, the industry to deal with. So we've seen a meaningful, you know, moderation in wage growth. I guess, how do you think about where we are today in terms of wage growth and, you know, whether there's still an opportunity for that to moderate while, you know, continuing to invest the way you guys need to, to keep turnover at a low level?
So, you know, we kind of budgeted, guided towards about a 4% increase
Yeah in wages. For the full year, we were at 3% Q1 and 4% Q2. So kind of second quarter, right on our number. That still is a little bit higher than we had experienced historically which is about 2.5%-3%. I do think there's some opportunity as the nation gets past some of its inflationary trends for that to moderate still back closer to more historical rates. I think in the more near term, we could see a little bit of pressure in some of these states that are implementing Medicaid supplemental programs these DPP programs because everyone's getting that money.
If there's competition for labor in some of those markets, you can have, you know, particularly some of your nonprofit providers out there being a little bit irrational in terms of how they use that money to go out and buy nurses and increase rates. You know, given that that's not going to be broad, all at once, I think that's more in targeted markets that we could see that, so I don't necessarily think it impacts more broadly the whole enterprise, but we could see some higher increases. We saw that during the pandemic with some of the pandemic relief funds. If you recall, You know, we had markets where nurses were getting, you know, 10% rate increases, you know, twice a year. and large, you know, $80,000-$100,000 sign-on bonuses. I don't think these DPP programs will take us back to that.
Yeah.
But I think you'll see something a little elevated over historical rates. All that said, I think, you know, we'll come in at near 4%. We still think it's a good guide for this year, and moderating into next year. Maybe a little bit lower.
Got it. And if we think about, you know, opportunities to manage, you know, labor that go just kind of beyond, like, the rate that you're paying.
Mm-hmm
Uhmm, what do you think is in front of the company in terms of other, you know, maybe multi-year opportunities, whether it's things like, you know, length of stay management, like, whether there's things administratively, that you can do a lot more efficiently, maybe with l ike, AI or other tools? Like, what are the big other opportunities to help drive down SWB as a % of revenue over time?
Yeah. Length of stay management, you know, certainly top of the list. That, that also opens up capacity for new patients. Our team nursing concept, which allows nurses to practice at the top of their license utilizing more LPNs, nursing assistants, to do some of the lower, you know, type of services, allowing RNs to do the more advanced work, is something that allows us to leverage, you know even the pay and the type of staffing that we're maintaining. Putting in Project Empower has components of that with the technology, not only around scheduling but around standardizing our pay practices, with paid time off and shift differentials and premium pay practices across the organization, giving us more insight into managing our workforce, will help us be much more efficient, as well as it's allowing us to move all of our administrative functions into a shared service environment.
Taking a lot of the accounting and administrative functions
Pushing up a line.
... out of each individual hospital a nd do it in a shared service environment, which we've built out. Not only more efficient, we can add automation, add AI into that. So all of that, I think is going to be beneficial. Last item on that, you know, we started this a year ago in 2023, predominantly, rolling out remote patient sitters. So it's technology with cameras and two-way communication.
So for a patient who's at a high risk of fall, instead of having an individual sit in the room with that patient, we have partnered with a company named AvaSure to have cameras in the room, and two-way communication, and you have a remote sitter who can watch up to sixteen patients at a time. We've actually found that it's far more effective in reducing falls than having an individual in the room.
Really
with the patient. So not only is it providing better care, it's reducing our risk from falls and ultimately, you know, professional liability. but also is allowing us to leverage kind of people and labor-
Yeah
okay, expense.
And then, you know, when we think about the other OpEx line in your P&L, you had the spike up in professional fee expense a few quarters ago. Obviously, you caught a lot of people off guard. I know one of the actions you took was, you know, to insource some positions in your market that were part of a partnership that, you know, was kind of unwinding. I guess, does that update us on the performance of that initiative? And to the extent, you know, you're still using external providers, how are you thinking about the rate of cost growth, and whether they are truly on a more sustainable footing at this point?
So bringing the insource, some of our hospitalist and ED doctors, was only about 20% of that group of physicians at practice. So relatively small, you know, albeit, you know, meaningful, but small percentage, has allowed us to reduce some of the subsidy payments. It was, I think, very effective at doing that. We've also seen a big satisfaction improvement amongst those physicians as they've gotten on to and been trained on our safety protocols, and feel like they're part of the team. more so than as they were operating independently. So we feel very good about how that's gone. Looking for opportunities to continue to expand the insourcing of both ED doctors and hospitalists, and have added several additional markets to that since that time last year. We're looking at anesthesiology.
Now, we've only brought in-house one or two, I think, two programs. so far for anesthesiology, so not big enough to be meaningful. But we are looking. We've hired, you know, some internal talent to build out an anesthesiology program cause you have to manage it a little bit differently, internally, but we've hired the talent to do that, looking at opportunities to bring in-house some of our anesthesiology. Radiology is kind of next on the list. All that said, we are seeing a stabilization of those costs.
They were up about 5% in the second quarter, you know, compared to the 25% increase last year that we experienced. So, we've guided to a 5%-10% increase for the year.
It was up 5% in the second quarter. I think staying in that range, it's kind of a moderate. We don't see it going backwards anytime soon.
Now that those physicians have the money in hand, I'm not sure that it'll be hard to take it away from them.
That seems to be the way it goes. Okay, and then, you know, as you think about, you know, the margins that you're, you know, you're targeting this year around, like, 12.5% You know, your medium-term target is more like mid-teens. As you think about the blocking and tackling that needs to happen for you to get there, I guess, how would you kind of break apart the opportunity there? Like, any kind of sizing around, like, how much of each initiative falls into driving that extra 250 basis points?
So there's a number of things. Had it not been for the headwinds of contract labor and medical specialties, you know, we would've already gotten to the mid-teens margin. We've done all the math and kind of stripped out those unexpected increases In 2022 and 2023. So if you go back and compare to where we were, which was about 12.3%, I think, pre-pandemic, we would've already gotten into the mid-teens. Having that headwind in front of us, I still think we can get there, but it's gonna require some additional work. So with continued growth, some of our higher acuity service lines that we're investing in and now that patients are, you know, coming back kind of maybe post the inflationary period, and the pandemic headwinds behind us, more of that commercial business coming back will be helpful. Now that I think we'll, there's still a little bit of tails we talked about on the rate increases and also seeing some improvements in government rate, both Medicare and the Medicaid programs, and then the work we're doing with Project Empower as we finish the implementation of that this year and being able to leverage that kind of over the next couple years, we should see some improvements in our cost structure. Not only getting rid of some of the implementation costs, in disruption that, that's occurring currently, but now as you're able to leverage kind of the new data that we have.
I still think some of our biggest benefits will be learning something about our business that we may not be able to see today. Not to mention, we'll be able to. You know, we're currently, we have some duplicate costs in with multiple systems, the legacy systems and the new system that we're currently running parallel today. As we go into 2025, we'll be able to get rid of some of those duplicate costs.
I thought you might have just said Medicaid Supplemental Payments.
And that is part of it, too. You know, we're attacking really a number of things, not only top line, but there's still some costs that we can take out. And I think between all of that, it will get us to that mid-teen margins.
Got it. Okay. So if we try to, you know, maybe break the margin improvement opportunity into things that would happen to the hospital industry more broadly, and the things that you think can be driven through Project Empower or other company-specific initiatives I guess, how much do you think of the improvement is driven by broader market conditions? And I guess, how much do you think is the company specifically driving that?
Is there any way to separate the two things?
You know, there probably is, and I would say I would give it equal weight.
I think the broader industry is maybe, you know, half of it, and then the things that we can control is, is the other half.
Okay. You know, on the capital and portfolio side of things, you know, hospital divestitures have been, you know, a pretty important part of the equity and leverage story in recent years. I guess, you know, I'd love to hear an update on how that process goes, and how we should still think about, you know, what inning you might be of kind of that review and potential, like, portfolio rationalization.
Hmm. I think portfolio rationalization, and I've been asked that question a lot is really an ongoing process for it, and I think it should be ongoing.
I don't know that that ever ends. So as much as I would like to say we're in the later innings of that game, and I think we are from at least the level of activity that we've had over the last couple years, I do think we're in the later innings, but I don't know that it ever stops. We are at a point now where we want to start looking at acquisition opportunities.
Still a little early in the game for that. Our balance sheet's not been in a position to really support that more recently. But if we had the right opportunity to, you know, roll some proceeds into the right acquisition-
I do think with the runway we have now, on our debt, and the reduction we're getting in some of the tailwinds that we have at our back, it would make sense to potentially- you know, if we identified the right candidate, to roll some proceeds into an acquisition. We've looked at a number, haven't found the right one yet.
But we have options. You know, I still believe that deleveraging with EBITDA growth, you know, it delevers quicker than, than just paying down debt. But we'll take a look at the opportunities as they come. In terms of the current divestitures that we have in flight right now, you know, we've closed on Cleveland.
We've announced the one in Pennsylvania and expect to close that in the fourth quarter. We have a couple additional deals in flight that we expect to, at a minimum, get announced, possibly closed by the end of the year, but at least announced by the end of the year, and we think the billion-dollar kind of target that we set out there is kind of right in line with where we think we'll be here in the near term.
Got it. And, you know, I think there's been, you know, more of a focus on trying to find, like, out-of-market deals.
Like, obviously, in-market seems like it's just been increasingly challenging.
I guess, like, how much more difficult does it get to effectuate these deals when you only really can consider, like, out-of-market buyers? And I guess, how much does that affect, you know, the valuations you're willing to ascribe to some of these assets?
Interestingly, it is definitely a different group of buyers, but we've not experienced any more difficulty, in, in getting deals done. You know, there's been a number of recent deals, you know, fairly large deals, not involving us, with out-of-state buyers. But, you know, I look at Cleveland, we closed Cleveland, which is a nonprofit out of Georgia.
that probably would not have been a buyer that we would've anticipated looking at that market. They had approached us, though.
A number of our inbound interest that have translated into divestitures for us, that inbound interest is coming to us from out-of-state buyers. As they're looking to expand, they know they can't expand within their market and so forth. So it has not made it any more difficult for us, really to probably identify potential buyers and, or to get deals done.
And multiples, very consistent with what we experienced kind of in our prior divestiture programs and what we're seeing today.
So you think they, I mean if the synergies to them might be lower, they seem to be willing to pay higher effective multiples then? Is that, like, the right way to think about it?
Yeah.
Yeah.
I think so. I'm not sure how they're analyzing some of these deals from the buy side.
Yeah. Okay.
But the multiples we're getting on the sell side still kind of in that 10-12 times multiple of EBITDA, which is deleveraging for us, and very consistent with what we were selling, you know, kind of back during our formal program between 2017 and 2020.
Okay. And then just in terms of the key items inside your, you know, your growth CapEx budget you know, what are the key, you know, big projects you have coming on over the next year or two? And how to think about the size of the growth CapEx budget, maybe over the next two or three years?
So I would characterize our capital spending to be about 50% growth and 50% maintenance. Has been that way for, you know, at least kind of the period where I've been CFO, has been right in that proportion. This year, we brought on a 56-bed patient tower in Knoxville in the first quarter. We have another inpatient bed tower, about 30 beds and four operating rooms that we'll bring on in the fourth quarter in Foley, Alabama. In both of those markets, we were kind of at constraint we had constraints from capacity, so we're expanding capacity. Last year was Naples, where we added a third campus in Naples and added about 100 beds in Naples. We don't have any large inpatient projects in flight right now.
But do have a number of outpatient in-flight for both the remainder of this year and on into next year, into 2025. Certainly, the outpatient access points are a little quicker to get up. You know, kind of in service, and can move much more quickly, whether it's freestanding EDs, some urgent cares. Largely, I would expect our growth capital to still be in the 50% of total capital spending range next year, but look, be more focused on some higher acuity service lines and building some of that out.
Okay. Great. I think that's a good place to leave it, so thanks so much for your time today.
Very good. You bet.
Appreciate it.
Thank you.
Thanks for coming.
Thanks for hosting us.
Yeah, of course.
Thanks, everyone.