Good morning. Welcome to Oppenheimer's 35th annual healthcare conference. I'm Mike Wiederhorn, the Healthcare Services Analyst, and it's my pleasure to introduce Community Health Systems and Chief Financial Officer Kevin Hammons. Today's going to be a fireside. We'll start, you know, jump right into it. Guys, first of all, appreciate you taking your time out today to, you know, spend the day with us. Always appreciate, you know, discussing the hospital industry with you guys. We'll start, you know, with a broad question. You know, can you just provide us an update on the business, how you're feeling coming out of Q4 into the new year and your current guide and kind of where you're relative to your guide?
Absolutely. Michael, thank you for hosting us today. Appreciate you putting this together and giving us the opportunity to present. As we come out of Q4, really feeling pretty good. We developed some momentum coming out of the year, going into the current year. You know, generally speaking, I would suggest that we have more winds at our back coming into 2025 than we've had in some time. You know, pretty good feeling about the year.
You know, as I think about our guide for the year and some of the specifics about, you know, where we are, certainly some prospects of some additional DPP funding coming in, although that's being delayed a little bit with some of the goings-on in Washington, but still feel good about that, and that should be meaningfully helpful to us, as well as some divestitures and the prospects of us being able to materially deliver in 2025, I think is certainly exciting for us.
You know, can you, you know, talk about mission trends going forward in 2025? You know, what are some of the puts and takes as far as your growth targets on that side?
Yeah. So, you know, we put in our guide 2%-3% volume growth. Certainly our admissions, if we think about some of the inpatient admissions, we had strong inpatient admissions in Q4. I think we'll still see some strength on the inpatient side in 2025. We've added, you know, over the past few years about 600 beds, inpatient beds. More recently in 2024, we added patient tower with approximately 58 beds in Knoxville, Tennessee, and another 30 beds in Foley, Alabama. Markets where we had been having some capacity constraints, still adding inpatient capacity, and those are growing markets. I feel pretty good about the inpatient side, as well as the, you know, overall volume and adjusted admissions, again, as I said, in the 2%-3% range.
Okay.
I think maybe if I could just add, if I could just add on to that as I think about the flu, we did have a late flu season this year, at least compared to some of the other years. Flu really did not hit until Q1. We did see a fairly, you know, heavy flu season. I do think, you know, although we benefited from some volume from the flu, that also is a little bit of a disruptor from some of the higher acuity services. As we sit here today and as we exit Q1, the flu is now behind us, and, you know, I think we should see some of that higher acuity business begin to come back here late this quarter and into Q2.
Perfect. Yeah. On contracting, what are you seeing in terms of managed care contracting? And, you know, has rates been impacted by inflation in the system? Kind of your overall thoughts and kind of at rate environments looking?
Yeah, I think the rates have been influenced certainly on a lagging basis with inflation. You know, inflation hit first. We saw some pretty big price increases. Over the past couple of years, we've seen our managed care rates up about 100 basis points higher than they have been historically. I would hope we've got a little bit of tail on that for another year or two. Certainly, I think for 2025, we're looking at probably 4%-6% average rate increase. You know, individually, we're seeing some rates or some contracts higher than that, but that's kind of an average with several of our contracts, you know, kind of rolling over, you know, from prior year negotiations. In 2026, as we start working on negotiating there, our expectation is somewhere in a similar ballpark.
What are you seeing in terms of mix shift, acuity trends, and how should we view those items going forward?
Acuity has been relatively flat, at least it was from 2023 to 2024. We are making capital investments in some higher acuity service lines. You know, as some of the elective business continues to come back, and I say elective business primarily from commercially insured patients that I think has lagged coming back post-COVID. As we continue to get more of that back in the system, I think there's some opportunity there for some higher acuity services, plus with our investment, we're certainly looking to increase our acuity going forward. Relative to payer mix, we're still continuing to see a shift from traditional fee-for-service into Medicare Advantage. That's kind of leading the change. In terms of overall kind of Medicare age population, Medicaid population, commercial mix, relatively flat.
We did see a little bit of decline in Medicaid volume this past year brought on by redetermination, but we're not seeing an increase in uninsured. We probably saw a little bit of that increase come back in the exchange business. And as I think about, you know, kind of the commercial book of business, I think the exchange business is probably leading the way in that respect.
You had experienced some issues, I think, with denial during 2024. How should we think about that as a headwind or a tailwind for 2025?
Yeah, we did. Particularly in the third quarter, we saw a spike in denials. That really moderated, or at least sequentially in the fourth quarter, did not get any worse. I think we're kind of at the peak, at least I would hope so. It was fourth quarter worse year over year still, but at similar levels we experienced in the third quarter. As I think about 2025, you know, probably two more quarters before we anniversary that, you know, jump up that we saw in Q3. I would expect Q1 and Q2 to look a lot like Q4 in terms of, you know, relative numbers of denials, which will be worse than they were relative to Q1 and Q2 of 2024. Then anniversary that in Q3. From a quantification perspective, it's about $10 million per quarter drag.
You know, we baked into our guide just about a $20 million overall incremental hit year over year relative to that increase in denials.
You know, continuing, I guess, with the payers, are you seeing any changes in your relationships with insurers given the challenging regulatory environment? You know, especially, are you seeing any change in the, you know, also due to the perception of the change in the media as well?
We've not really experienced any changes in the payer behavior. I think our relationships, you know, are about the same. You know, we continue to negotiate with them and, you know, try to partner with them when we can. In terms of their behavior, and even in the environment where I know there's been a lot of pressure, both from a media perspective, pressure on them from even the administration, the government pressure, maybe more of a spotlight being shown on the payers and some of their behavior, we really have not experienced any change. Denials are still coming in. They're still at an elevated rate. Claims are still being downgraded. Pre-authorization, you know, rates haven't really changed, and we're still seeing, you know, requirements for pre-authorization for procedures that traditional Medicare doesn't require.
All that said, that's why I don't think we're going to see any real change in denials, although, as I said, they've moderated, but they're not getting any better.
Let's move on to cost initiatives and, you know, on the cost side. You know, labor, you know, can you talk about the labor trends and what you're seeing here, your outlook, and, you know, and also relative versus, you know, inflation going forward?
Yeah, happy to. Last year, we saw labor kind of inflation rate increase about 4% of net revenue. That was down from 2023. I think in 2025, we'll continue to see, you know, maybe a little more softening of that. We're currently predicting what we've included in our guidance is about 3.5%-4% labor inflation just from a wage increase standpoint. Maybe a little bit better than last year, but not significantly and nowhere near kind of that historical 2.5%-3%. I don't think we're back there yet. That being said, we're making very good progress in terms of our recruiting. Our nurse turnover, actually our turnover of all positions, but specifically nurse turnover rates are in the high teens, which is the best it's been in several years.
You know, our recruiting function that we've moved into a centralized environment has worked for us extremely well. We're adding a lot of nurses and able to, you know, take out contract labor, although I think we're getting down to the levels that are pretty close to pre-pandemic. At this point, I don't see a big decrease in overall contract labor, but we're able to support that with, you know, full-time labor as necessary.
Okay. Let's move to physician fees. You know, what's the latest on physician and specialty fees? How are you viewing this line item going forward? You know, how have the insourcing, you know, efforts gone?
Yeah, medical specialist fees and physician fees continue to be a pain point for us. They were up, you know, roughly 11% last year. We're budgeting for an 8%-12% increase in 2025. Still seeing, you know, some outsize increases in certain markets, particularly in anesthesiology, which is the biggest pain point at this point. We're still looking at opportunities and continuing to insource some of our ED doctors and hospitals programs, which we've experienced really good success where we've been able to do that. More recently, we've insourced a fairly large market on the anesthesiology side. Led to a little bit of a medical specialist fee hit in Q4, but that's behind us now. We've got the doctors hired and are running that program, you know, from an insource model, looking at some other markets where we can insource anesthesiologists.
You know, generally, I think that'll be slower getting those kind of programs insourced, but we do have some expertise internally now that can support an insource program there. Radiology is kind of the next pain point. We're starting to see some of the radiologists where we use independent radiologists looking for higher payments and more fees on that end. I think that's an area where technology can be utilized more, whether that's, you know, reviewing images remotely, using some AI. I think there's more technology that can help offset some of the radiology headwinds. Hard to do anesthesiology remotely. Radiology, I think we have a few more levers we can pull that mitigate some of those risks.
Perfect. Let's move over to Washington, the regulatory environment. A lot of questions. That's obviously in the news every hour. You know, kind of broadly speaking, you know, if we think about Medicaid, you know, potentially either being restricted, you know, budgets being cut, state budgets, how are you thinking about it? How are you thinking it could impact you and potential offsets from your, you know, from your side?
Yeah, there's certainly a lot of moving parts. There's been a lot of noise coming out of Washington, D.C. around the regulatory environment and cuts and so forth. I'll go back, anchor a little bit on some of the messaging that came out of the administration initially, which was they were not going to touch Medicaid and Medicare. I think despite a lot of the noise, at the end of the day, I really don't expect there to be any major benefit cuts in Medicare and Medicaid. I do think, you know, on the margins, we could see some changes, particularly around maybe some work requirements on Medicaid. I think you could see the enhanced subsidies potentially sunset, you know, for the health exchanges.
You know, all in all, I think anything we see coming out, you know, of this next round of, you know, budgets out of the administration is going to be something that we can manage through. Again, I'll go back to I just don't think there's going to be major benefit changes. I know there was a lot of concern, particularly around Medicaid with redetermination, that the roles were being cut. A lot of people would fall off the Medicaid roles, and that was going to be a big headwind for providers. You know, at the end of the day, that occurred last year. Although we, you know, have seen some decline in Medicaid volume, a lot of the individuals that came out of Medicaid ended up, at least, you know, a certain percentage of them ended up with commercial insurance and were probably net better off.
We did not see an increase in the uninsured that everyone was so concerned about. I think, you know, just using that as an analogy, I think we'll see a little bit of the same this go round where you can see some changes. At the end of the day, I don't know that it's going to be that material to the providers.
That's great. You know, you mentioned supplemental payments. Obviously, this continues to be highlighted here, you know, these programs. How should we be thinking about this in the context of, you know, the administration? You know, do you think these programs will continue to be approved, you know, and then kind of you can give us also kind of the progress of some of the other states that have been looking into it as well?
Yeah, I mean, there's certainly risk. We're not naive to that. The directed payment programs really became in vogue during President Trump's first term in office. There's been generally bipartisan support for these programs. We have every expectation that at least the couple that are in flight right now, which would be New Mexico and Tennessee, will get approved. CMS has put out a freeze on communication, you know, with the change in administration until the leadership there is confirmed by the Senate. I know Dr. Oz had his confirmation hearing just this past Friday. All indications are that he's going to get confirmed. The Senate, I think, is on recess this week and back in next week. What we're hearing, at least through the grapevine, is that that confirmation vote will come up for a thumbs up, thumbs down in early April.
What we're hearing out of CMS is, you know, once they get confirmation, then they'll start releasing information. Right now, it's a communication freeze. We're just not hearing about the DPP programs. I think in the background, all the work is still being done. We'll expect to get those approved here, you know, potentially sometime in April. I don't know how quickly they'll start getting communications out. I would hope that by, you know, by the end of April, you know, all that information has been made public. You know, other states, Indiana is working on a program. It's going through their state legislature right now. Don't know exactly where that is or what form that program will take. I know it's passed the state house. I think it's with the state Senate right now.
There are still some negotiations in terms of the structure of that plan. They are looking to add some sort of directed payment program in Indiana. A couple of other states, Alabama is in some early stages, as is Arkansas. I think they are all, again, earlier stages and probably not a 2025 item, but maybe setting themselves up for a program to go into effect in 2026 in those states.
Perfect. Two issues that continue, you know, kind of we hear in the news, the site neutrality and price transparency. You know, if you want to, you know, kind of touch on both, kind of your thoughts, kind of where they stand right now, how you think those affect you, you know, competitively.
Yeah, I still think on site neutrality, still not complete agreement on what the definition of that is. Still some work in Washington to be done on that. Generally, at least how we see site neutrality and maybe the more common definitions of that, you know, would suggest that, you know, your off-campus procedures would not be paid at the HOPD rates. As we think about our business, I do not think that has a real material impact on us. Maybe, you know, a slight impact. Generally, our surgery centers and our off-campus locations are on their own rate structure. We do not operate the majority of those. We do not operate as HOPDs. I think, you know, given that, site neutrality would have a limited impact on us.
Thanks.
Yeah, on price transparency. You know, we haven't seen much of an impact thus far on price transparency. It's still very complicated. I'm not sure it's accomplished maybe, you know, what some thought it would and still doesn't give complete, you know, visibility into all the different myriad pricing structures and contracts that are in effect out there. I don't know that it's the tool for selecting, you know, for consumers selecting, you know, procedures and where to get their healthcare as it was intended to be. Generally, I don't see it as having much of a negative, if any negative impact. In some cases, it's probably been a little bit of a positive for us because generally in our markets, we are not the ones with the highest charges.
I think the price transparency for us, if nothing else, may be a little bit of a positive.
Okay. Let's move away from Washington over to the capital environment balance sheet. Maybe kind of give us an update on your divestiture efforts. You know, what type of deals are you focused on? What valuations are you seeing, you know, kind of, you know, at this point in time?
Yeah, happy to. We closed one deal earlier in March here, March 1 in Florida. Got $260 million of cash proceeds in hand. We have one additional deal that we're anticipating closing here by the end of the quarter and getting those proceeds in hand. That would be North Carolina. Still working on a couple of additional transactions. We're in kind of enhanced stages of discussions on those. Do not have timing as to when we may get asset purchase agreements signed, but hopeful that those are continuing to move along. You know, multiples continue to be very strong, if not even a little bit stronger on the more recent deals than we've experienced. You know, in that 10-12 multiple range is what we're looking at.
Obviously, you know, we try to push that up as high as possible and looking at, you know, potentially being at the higher end of that on some deals. I think we can get a little bit more done this year in terms of divestitures. I do think we're getting closer to the end, although we'll always consider, you know, when the circumstances present themselves, whether it's through inbound interest or changing environment in a particular market, you know, whether or not we would want to sell and kind of put those proceeds to use either through deleveraging or through other investments. I think, you know, our ultimate goal here is to delever the company. And we've been making some really good progress. I think we're positioning ourselves here in 2025 to further make progress on that deleveraging.
Yeah. I guess, Kevin, what do you see as your comfortable leverage position? How do you view the potential for M&A versus debt pay down at this point?
Yeah, I mean, we have a goal that we stated by 2027 to get below five and a half times levered. You know, at the end of the day, maybe more philosophically, I'd like to see our capital structure more balanced. If you think about us trading in the, you know, 8x- 8.5x EV to EBITDA range, you know, something even, you know, below 5.5 certainly would be a longer-term target. That is our 2027 target. I think we're well on our way to achieving that. In terms of investment versus pay down, you know, there are two ways to lower your leverage. It is either to grow EBITDA or pay down debt. I just think, you know, when we have proceeds in hand, we kind of weigh the opportunities out there and what makes most sense.
I do think we are getting closer as we do make progress on our leverage. We're getting closer to being in a position where we can think about acquisition and maybe growing through some acquisition or other investments. Certainly dipped our toe in a little bit with the acquisition of Carbon Health, which urgent care centers in Tucson. I think in terms of an actual acute care acquisition, still maybe a little ways out. Getting closer to that, Tim and I have been looking at some, and we have been over maybe the past 18 months or so. Nothing's come to kind of come in front of us or come to our attention that was all that interesting at this point. We're still probably a little bit early as I think about our balance sheet to go do something. Again, getting closer.
If we wait till our balance sheet's in the right position, we're going to be too late to the game. We will continue to look. If a divestiture and an acquisition timing happened to work out, it might be something really interesting for us. I do think growing EBITDA is a quicker deleveraging tool than just paying down debt. We will be disciplined about how we think about the 2 and kind of take it one step at a time.
We've got time for one last question. The question I'm asking every one of the companies today. You know, what are you seeing as the role of AI in your business model and opportunity there?
There is a lot of opportunity in AI. We're certainly deploying AI in a number of areas. We've got a team, an internal team, a data science team that's been doing some development of AI. We look at opportunities and use cases for either development versus purchasing. It is across the business from patient registration. There are some opportunities there. There is some AI use in our patient access centers, which is where patients call in and schedule appointments and using AI to schedule those appointments. In the clinical care areas, there are a number of areas that we're either implementing or exploring implementation of use of AI to support physicians in their delivery of care, in bed management, in the management of employee productivity and staffing. Even post-discharge, there are some AI use cases in the revenue cycle with denial management and so forth.
You know, I think it's going to be very important. It's kind of a force multiplier, if you will. We're certainly looking and making some investments in that across our business.
Perfect. We are out of time. Appreciate your time today. Appreciate your participation as always. I look forward to talking to you guys in the future and keep up the good work. Thank you.
Appreciate it, Michael. Thank you. Take care.
Thanks, Mike.