Yeah, so, you know, good morning. It's still the morning here, I think. I'm Stephen Baxter, the Healthcare Services Analyst here at Wells Fargo. We're very pleased to have Community Health with us here today. As I'm sure many of you know, Community is one of the largest operators of acute care hospitals in the country. From the company, we have a President and interim CEO, Kevin Hammons. And we have Jason here as well, who's the interim CFO. So thanks again for being here. Any opening remarks that you wanna make, or just should we go right into the questions?
No, let's jump into questions.
Okay, great. So, you know, I think, you know, the biggest, you know, I think surprise maybe across the industry group, you know, during the second quarter's results was maybe the slower, you know, growth, both slower growth of volumes that we saw. You know, I think you noted earlier in the year that commercial demand, you know, for surgical procedures was a little bit weaker in the first quarter and didn't improve maybe in the second quarter the way you thought it might have. Just give us an update on kind of the right way you think to characterize, you know, the volume growth comment on the quarter and how it informs, you know, how you're thinking about the balance of the year.
Sure. We have seen kinda softer than expected volume growth this year. We certainly brought a lot of momentum from kinda the back half of 2024 into this year, expected that momentum to continue, but I think you know whether it was directly related to maybe the change in administration, not so much change because I think a lot of the momentum that picked up in the fourth quarter related to that, but it's more talk of tariffs.
Some uncertainties in the economy were ahead of us. People got more concerned, from a financial perspective. We didn't see some of the early rate cuts that we had expected, in the year, and that caused some concern. So where we have seen the most kinda softness or pullback from a volume perspective has been in some of the elective procedures, outpatient elective. And I think it's a little more, you know, it's related to people with high copays and deductibles wanting to hold on to cash, and they're deferring the procedures that they can. I do think that's somewhat transitory, and we'll pick back up.
Okay. So, yeah, so it sounds like that is primarily a commercial-driven phenomenon. I guess as you look at the trends that you saw, you know, maybe in commercial payers versus what you saw in Medicare, maybe Medicaid as a volume trend, like, what are the differences kinda stand out to you in the first half?
Yeah, we've seen, you know, some strength in Medicare Advantage. More business still, transitioning to Medicare Advantage. A nd the offset to that being Medicare f ee-for-service. A little bit of softness in Medicaid, but primarily in the commercial space is where the softness has been.
Okay. And as you've continued to track, you know, some of the measures around consumer confidence, like, I think people, you know, maybe have gotten more used to the idea that, you know, some of the headlines that we've seen, you know, kinda might be transitory or maybe kinda. Continuing to get deferred out. Do you feel like, you know, you've seen people more willing to act and to kinda, you know, get the procedures done, or do you think that still kinda remains like a wait-and-see issue?
We did see some improvement in June. I think from a consumer confidence standpoint, we probably hit a low mark in the middle of the second quarter. We did start to see some improvement in volumes in June. As we put out our guidance for the remainder of the year, we wanted to remain a little on the conservative side, because things really hadn't turned yet, at least not where we were comfortable.
So we've guided to the back half of the year for that continued softness. But you know, I think we'll, you know, as things continue to improve from a consumer confidence standpoint, I think you're starting to hear more discussion of rate cuts. As you mentioned, the people are getting a little more used to the tariffs, and some of these, some of the disruption from tariffs and the inflation aren't pulling through like people had thought they might. I do believe that people will get more comfortable and begin to come back in for those procedures.
Got it. And then, you know, like, totally hear your point that, you know, the, the surgical trends were soft in the first quarter and the second quarter, and they, they look pretty similar, the performance. There was like a, you know, considerable step down still in the adjusted admissions line despite the fact that the surgical trends didn't change a whole lot. I guess what do you, you know, would characterize the medical volumes inside the hospital as doing? How did those act in the second quarter?
Yeah. The inpatient volumes were stronger. So where people really need care and don't have a choice. We're capturing that business in our markets. So we are seeing some strength on the medical side.
Okay. And just to, you know, kinda factor in, you know, the conversation of what you've now assumed in guidance for the rest of the year on the volume side, just remind us again, it sounds like you feel like you've reflected the continued softness into the new guidance, or I guess how do you think about, you know, if trends stay where the second quarter is, where that might influence, you know, your kind of ability to deliver on the range?
I do think we've factored in the softness. So, year to date through two quarters, our adjusted admissions were about 1%. You know, we're guiding to the full year of kinda 0% to 1%. So kinda, you know, flat to only slightly negative, in the back half of the year from a volume perspective. Although that is a lot, we were at 2% to 3%. Is where we were initially expecting for the year to be. So we've kinda factored in the softness in the back half of the year.
Got it. And then, you know, there were a lot of moving parts when, you know, you revised your guidance with the second quarter. You know, there was the, you know, kinda the what you call maybe the core underperformance. There was the inclusion of more Medicaid supplemental funds, you know, inclusion of maybe more divestiture. EBITDA impacts. Like, just kinda walk us through, you know, if we strip that down to the core business, you know, what you saw in the second quarter and then kinda what you factored into the back half, how much of that, you know, deviation continues in your thinking?
Maybe the way I'd do it if I think about our full-year guide at the midpoint, originally it was $1.525 billion. We had about a $70 million miss in the second quarter, so factoring that in, we factored another $70 million headwind in the back half of the year. A nd then about $25 million from the back half of the year from the divestiture of Cedar Park. Cause we had had that in our full-year guidance for the full year. That was offset. So that's, you know, call it roughly $165 million of headwinds offset by about $140 million, tailwind from the DPPs. Which lowered our midpoint by $25 for the full year.
Got it. And then in terms of what needs to happen for, you know, the $70 of underperformance to be $70 for the whole back half, so run rate, you know, $35 million. Like, what are the key leverage to get from the $70 to the implied back half?
It's a combination of, you know, a little bit of volume. I mprovement, but payer mix. Improvement as well. We'll also see a little bit of benefit as the new Medicare rates go into effect on October 1. So all things being equal, you get a little bit of rate lift in the fourth quarter from your Medicare rate increase.
Okay. And then if we were just to step back and, you know, a lot of moving parts impacting the margins, but if we just focus on, you know, cost performance throughout this year, you know, could you spend a minute or two just updating us on, I guess, where you stand on, you know, labor, both full-time and, you know, sort of use of contractors? And then maybe we can talk about professional fees after that.
Sure. Jason, you wanna take the labor one?
Yeah. So we've been really pleased with our labor. I think it's three and a half, 4%, which is what we've guided toward. And I think we're managing toward that and still expect that to continue. Contract labor is well-managed now, down from the highs that were kinda the COVID or post-COVID, both the rate and the usage of contract labor. So that's more normalized now. Med spec fees are a continued challenge I think they've peaked, but they're gonna continue to be something that we'll have to manage through.
Okay. And just in terms of the, you know, the outsource fees, I think it's kinda migrated from, you know, early pressure in anesthesiology to more recent pressure in kinda radiology. Like, any notable trends across the different, you know, sort of categories that you guys would call out?
Yeah. I would say that anesthesiology still remains our biggest pain point. We're seeing more in radiology as well. That, that's starting to pick up. As an additional pain point. From a mitigation perspective, I think there are more mitigating steps we can take on radiology. Because you can pull in technology. You can do remote reads. There's some AI capabilities out there. With anesthesiology, you have less of those opportunities. But we are mitigating some of those increases by insourcing. By bringing more of those specialists in-house to do that work. It does increase our salaries and wages. B ut from a EBITDA benefit. It's a net benefit if we can bring those in.
Yeah. And you had a big insourcing effort, you know, over the past few quarters in, you know, response to kinda market conditions and what happened to some other firms that were in the market. Just kinda update us on how the performance of those, you know, those groups have worked out and just, again, how that informs your appetite to do more of that.
They've worked out very well for us. We're, we're seeing, you know, particularly on the ED and hospitalist side. Patient experience improves. The doctors have been very pleased that we've brought in an in-house. So the physician experience or physician satisfaction has been better. We've gotten them more integrated with our own quality program. So we've seen some quality improvements by having them insourced. So we think that, you know, it's probably not something we would do in every market. But certainly where there are cost pressures, it seems to make a lot of sense.
Okay. And then to pivot a little bit to, you know, the policy side of things, you know, I think you've done a very good job of giving us some color on the Medicaid supplemental payment side. So we'll come back to that in a minute. But, you know, the most near-term thing, you know, that seems like it could happen to impact 2026 would be the expiration of the enhanced exchange subsidies. Where that to occur, just kinda update us on, you know, your most recent, you know, sort of sizing of that business to you today and any kind of initial, you know, thought process around how you might adopt some kind of provision for that in your, you know, eventual guidance for next year if that were to materialize?
From a sizing standpoint, our exchange business is less than 5% of our net revenue. So we run a little bit below, probably the broader industry. In terms of exchange business, in our markets. So the subset of that that could potentially be subject to reduced, enhanced subsidies is only a subset. So it's a relatively small portion of our net revenue. Where that goes from here, we don't know. You know, I certainly don't know.
There seems to be some momentum on further extension that we continue to hear about. As recently as last week, I was speaking with some folks from Washington, a senator from one of our states to where we have a pretty big presence and a Republican senator who has been advocating for extending the tax credits. And he's working on a number of his peers in the Senate to get some momentum for that.
Okay. And as you think about, you know, trying to translate what it could mean, you know, maybe either into, you know, volume metrics or what it means to the P&L, I guess, like, do you feel like you have enough information to be getting closer to being able to estimate that? Is it as simple as, you know, a point or two of the five, you know, largely just kinda goes away and it drops through your P&L? Or I guess, how do you think about the way these people use the system today to kind of inform any of those calculations?
Yeah. I really don't think we have the information to really inform us on to be able to quantify that, because some states may deal with it differently. P rovide, you know, some other programs. Some of those people with the exchange programs may just down tier from a gold to a silver to a bronze. And still have hospitalization coverage. And so we really don't have the information. I think it's pretty difficult to assess, exactly a dollar amount. Of impact. But knowing that, again, you know, less than 5% of our overall net revenue is subject to exchanges, it's pretty immaterial amount.
Okay. And then just in terms of, you know, like, as you've started to probably pay more attention to it, like, in terms of how these people use the system, maybe in contrast to, like, an employer-based coverage population, I guess, like, what stands out to you as, as different in, like, the utilization of services, service categories, those type of things?
I think it weighs a little more heavily to the emergency. T ype care, versus, you know, any of the elective or, or other, type care.
Okay. And then, you know, this year, you know, on the Medicaid side of things, you've obviously gotten some, you know, some good news on the Medicaid supplemental payments. I know those are in the run right now and, you know, grandfathered in and all that good stuff. Do you look at your states now and think, like, you know, basically your states have gotten done what can be done here? There's obviously been a lot of conversations about whether states could maybe look at some incremental funding streams that could still kinda get across the finish line and be considered, you know, grandfathered under the current policies. Like, where do you think your states are in that discussion?
I think a few of our states are still, you know, have plans submitted, that have yet to be approved. So there's still some more upside opportunity for us. You know, Indiana has submitted a preprint, for a program to replace, their existing provider tax program. With the state-directed payment program. Georgia has submitted for an adjustment to their plan. Texas just had theirs approved. Just this past week. I think Florida has submitted for an adjustment to theirs. So I still think there's some opportunity for some additional funding mechanisms to be approved.
Okay. Any early sense of materiality or just way too, way too early for that?
I think too early. Yeah. Yeah. We try not to get. At the start. Yeah. Too, too far out in front of those, particularly because, you know, CMS can come back and make changes to what's been submitted in the preprint. So, a little early to tell.
Okay. Fair enough. And then, you know, this maybe would've been a question related to, you know, the potential, you know, headwind from the exchanges. But I guess just as you look at, you know, planning for this operationally and trying to develop contingency plans that, you know, maybe would allow you to offset, you know, some of the potential impact of what that could mean. Like, are there work streams like that that are in progress for the company? Or are those just, you know, in addition to normal things you might be doing to improve margins? Like, do you think there is some, you know, additional, like, cost opportunity or efficiency opportunity that you'd be able to go at specifically in response to, you know, what the exchanges might do over the next couple of years?
Right now, our priorities, and we have a number of kinda cost savings priorities. Ongoing right now. Those are more in the normal course. I would say, and not specific to some of the current regulatory. Environment. Because I think, one, there's a lot of work we can still be doing, in the normal course to gain efficiencies, to take some costs out. Our recent ERP that we've implemented. Getting that stabilized, and there's still a lot of tailwinds that we should gain from the information that we're now gathering as a result of having invested in that program or that technology. As I think about, you know, specific to the legislation and what we might do there, I think it's further down the road.
Those cuts really, particularly the Medicaid cuts, don't go into effect until starting in 2028. They're phased in over a 10-year period. And there's a lot that could happen between now and then before we wouldn't wanna get too far ahead of ourselves in terms of, you know, taking a look at various service lines and so forth. Although, you know, probably some early planning would suggest that there's service lines that if Medicaid was not funding, that we could scale back on.
Okay. And then you've also talked about, you know, trends on denials as kinda being a stubborn pressure point for the company. Just, you know, update us, I guess, you know, what you've seen as you've moved throughout the year on denials and what's your expectation for denials through the balance of the year?
If you recall, in the third quarter of last year, we saw a sizable step up in denials. It's been pretty stable. Since that time, denials haven't, the payers haven't pulled back any. It's still, you know, we're still seeing increased denials. But it hasn't proportionally gotten worse. So it's been relatively stable over the last couple quarters. And I would think that, you know, over the remainder of the year, it would stay at the levels that they're at. But we're not seeing any relief at all from the payers.
You know, is it broad-based from insurers that have, you know, different business lines? Is it primarily concentrated in commercial or Medicare or somewhere else?
It's primarily concentrated in Medicare. I n the Medicare Advantage space.
Okay. And then just to think a little bit about, you know, the commercial rate environment, you know, I think, you know, we went through this cycle where the industry as a whole saw a pretty intense bout of wage inflation and helped, you know, kinda put upward pressure on commercial rates, you know, over the next couple of years. It feels like we could be getting to maybe the end of those above-trend type rates. I guess as you negotiate contracting for 2026, what do you feel like you're seeing from the payers in terms of their willingness to provide rate updates at the same level they have over the past couple of years?
We're still seeing some pretty good rate come through, similar to the levels over the past couple years. So that, that tail with some of the inflation coming in seems to still be benefiting us on, on the rate negotiation. So, you know, I'd call it on average 4%-6% rate increase, on the commercial side, which is where we've been kinda the last two years. So it's, I think it's helpful. It's beneficial. You know, historically, we were in the more of a 3%-5% range. And right now, as I think about 2026, we're about 75% of the way through our contracting for next year. A nd still seeing a little higher level rate increase pull through.
Got it. And then it's an interesting contrast 'cause on one end you have the denials, but I think, you know, on the other hand, there's been a lot of focus, you know, especially recently across the industry about, you know, opportunities to use technology to, you know, leave maybe, like, less financing and, like, less yield on the table when you're dealing with payers. I guess, where do you think about, you know, where you're at in the process of maybe, you know, these initiatives that could, over time, improve your yield? And, you know, how much visibility do you kinda have to driving that yourself versus, you know, your RCM vendors?
We are investing a fair amount. We've been doing a lot of work on the side to kinda reduce denials to improve our coding. We are using some technology in both those. We're using some AI to generate appeal letters and. You know, to help in those collection processes to mitigate. Had we not, and even with those efforts, we're kinda stable, where we're, you know, where we've been from a denial perspective. So I would say had we not been investing and putting forth some of the additional efforts on our side, the denials would continue to get worse. Because I think, you know, similar to what we're doing, I'm sure the insurers are investing in technology and use of AI on their side to, you know, mitigate their cost as well.
Yeah. I think that's fair to say. And then, you know, obviously, as we think about, you know, not so much we haven't seen it, and we've touched on tariffs kinda earlier in the discussion. You know, latest thoughts on, you know, I guess, exposure to potential tariffs? It still seems like it's a moving target, but, like, what do you see as those discussions continue to evolve?
We've been fairly well protected, through our group purchasing organization. Health Trust Purchasing Group, in having longer-term contracts. You know, a pretty significant portion, I think, around 50%, if memory serves me right, of our purchases are domestic purchases. We have, you know, a relatively small amount of purchasing coming from China. So we haven't seen much of an impact from the tariffs yet. Now, what we don't have complete visibility into is, you know, like, raw materials, even where we're doing domestic purchasing. If some of the raw materials for the manufacturing. Are coming through and will flow through. But right now, you know, the majority of our contracts are three-year contracts. So only about a third of those turn over each year.
Where we're having to renegotiate. We've not seen any noticeable increase in kinda pricing outside of normal inflationary increases.
Okay. Can you maybe spend a minute updating us on, you know, divestiture pipeline? You know, act of good you've gotten this most recent deal done and now reflected in your guidance, but where do discussions around, you know, potential divestitures stand? You've completed a lot of these over the years. Just how fruitful, you know, do you think the remaining opportunity set i s?
We don't have any particular or specific deals right now that we've talked about. I would say that there are several opportunities that are in flight. We have some inbound interest. We've been having conversations in a couple different markets with you know several different buyers on some potential transactions. It's a little early to say yet where those will come out. I would say that it's you know highly likely that we'll continue to pursue some divestitures. I think given where we're at you know it's September already. Time flies, doesn't it? This year that I don't think we'll get anything else done.
You know, it's unlikely that we would have another deal completed this year. But if things continue to progress in our conversations, you know, first half of 2026 is likely we could get something done and we'll continue to work on those where they make sense.
We do have, not a hospital divestiture, but we've got the outsourced lab business. T hat we've announced that's gonna we expect to close at year-end. It's about $200 million.
Good point. Yep.
We expect another $100 million of proceeds related to a divestiture of a hospital in Tennessee last year. T hat was contingent upon the DPP in the state and that we should be coming in in the fourth quarter.
Okay. Good to know. Do you feel like the conversations have gotten any more complicated because of the macro uncertainty or because of the policy moving parts around potential deals?
You know, I can't say that it's changed a whole lot. I think it impacts certain buyers differently. Certainly with the big beautiful bill has impacted at least in the near term the academics. Probably more so than you know the for-profits. Or even some of the other, non-for-profits just because of the loss in grant funding and some of the taxes on endowments. Which go into effect immediately. V ersus, you know, others of us who, the issue is more in the Medicaid funding, which is deferred and may not actually occur. So I think that's changed a little bit of the dynamics in terms of who some of the buyers could be or how they're looking at it. But overall, I would say there's still, you know, a fair amount of activity and interest. And I haven't seen any change in real valuation.
Okay.
Discussions.
Yeah. And in a similar theme, I mean, as you, you know, think about your competitors and their willingness to kinda either deploy capital on, you know, like, deals or, you know, kinda their own just internal CapEx plans, do you think there is, like, a real kinda, like, pause out there at the moment? Or do you think that, you know, you and the rest of the industry, you know, feel like in your markets that things are gonna be pretty similar to how they've been the past couple of years?
I think for many of us, our view is things will be pretty similar to how they've been the past couple years. Again, I think the pause in some spending is probably focused more on those that have more near-term impact from the regulation, and those of us that don't have a near-term impact are seeing things a little differently.
Got it. Okay. And then, you know, in terms of the company, you know, you have these medium-term, you know, targets out there. You have, like, a mid-teens EBITDA margin that you're gonna be looking, you know, to strive to over the next few years. Like, what do you think are the key areas, of execution that'll be required to kinda march towards those margin targets, you know, over the next few years?
Some of these programs are certainly beneficial to us. Kinda the return of the volume. And I know we're experiencing a little softness right now, but as I mentioned, I think that's transitory. And as that volume comes back, particularly, you know, the volume on the commercial side should be accretive to EBITDA. And so that will help us, you know, pretty materially, I think, even on the margin profile. Now that, you know, as we've gotten some of these other divestitures done, we are, you know, close to getting to free cash flow positive.
I think on trailing 12-month basis, as of June 30th, we were just slightly negative, which is a material improvement over where we had been historically. And I think we've seen steady improvement in that area over the past eight quarters. So that kinda flipping to positive, also allowing, you know, for some additional reinvestment, or some deleveraging will really help jumpstart us getting to, those medium-term targets.
Okay. And then, yeah, just, you know, Project Empower obviously has come up a bunch now. In terms of the, you know, sort of the key milestones there, I guess, like, where do you stand in terms of things that have largely been, you know, kinda completed and put into place and things that are still kind of in front of you over the next couple of years?
All the technology implementation's complete. R eally effective one-one. We got all the technology in. The company is running on the full integrated platform now, so what we're working on this year, and we're already starting to extract value from it. As we're turning off some of the duplicative software systems and t hat we've replaced. Some of those are turned off already. Some of them, their expiration of their contract will come up throughout the year, and, and they'll effectively all be turned off by the end of the year. But that is just incremental value to us as we turn off those excess costs.
The insight we're getting into the supply chain now that we have our entire enterprise on a single integrated system, a single item master from a supply chain perspective, is giving us more insight in terms of how we contract. So it kinda ramps up over time as we renegotiate some of these contracts. We have better visibility into our spending. We're able to do more bulk buying and leverage our scale in a different way than we h aven't in the past. So we'll extract benefit this year, but I think it will continue to grow probably over the next two years getting value, increasing value out of that.
Got it. And then obviously, you know, you have targets to delever the company. And, you know, a combination of that is happening, you know, through actions you're currently taking on the balance sheet. You know, a lot of that will come through delivery of, you know, these EBITDA margin targets that you've set for yourself. Just kinda walk us through the key pieces of, like, how you think you get from where leverage is today to where the targets are, you know, a couple years out.
You know, it's a balance. Some additional divestitures. W ill take place where we'll be able to use proceeds to pay down some further debt. And as long as we're selling, or completing those transactions at favorable valuation multiples, that should be delevering. And then growing the core business. A nd we see some good growth in our core business. And the balance between those two, you know, we've brought, again, over the last eight quarters, our leverage from around 8 to, you know, so now it's around 6.8. And that should be able to, you know, we should be able to take another. You know, turn plus out of that, and get us to our midterm t argets of 5.5 or below.
Okay. Great. And then just in terms of, you know, maybe just the last couple questions would just be, you know, sort of CapEx priorities and, and how those have evolved, you know, over the past couple of years. I know that, you know, as you're evaluating assets for potential sale, maybe there's, you know, like, changes in how you approach CapEx. As you maybe have more of a set of assets that you seem like, you know, reasonably sure will be with the company for the next couple of years, like, you know, where do you need to spend CapEx to deliver on that core growth, you know, over the next few years?
Over the last few years, you know, we've made a couple large CapEx expenditures or projects more on the construction side. We've added patient towers in Knoxville, a large patient tower in Foley, Alabama. So those were assets that were at capacity from an inpatient perspective, that we wanted to build out additional capacity, for growth. Currently those are both completed. Currently, we don't have any large construction replacement hospitals being constructed. So we'll be able to focus a lot more of our capital on outpatient access points. T hose are less expensive, quicker-to-market type projects.
You know, probably pivoting some of those dollars to maybe even acquiring some clinics. We acquired some urgent care centers in the fourth quarter in the Tucson market. As an additional access point. There's some ASC development going on. We've got three ASCs that we'll be bringing on board between now and the end of the year. We've got a couple freestanding emergency departments that are in flight. Those are kinda de novo builds. B ut they're relatively quick to stand up and lower cost point t o build a freestanding ED. So we'll continue to pursue those type of investments around our networks of care.
I guess how different is, like, the return profile, like, dollar of CapEx on outpatient versus dollar of CapEx on, like, inpatient?
It depends on the market. It's really largely dependent on the market, around the payer profile. And a lot of these access points, really you have a return on the outpatient side, but you're also, as an access point, it becomes a referral source as well, in terms of bringing in additional inpatient business. So if you're picking up additional patients in an urgent care or freestanding ED, oftentimes they're coming in with higher acuity needs. But then that patient gets transferred to the hospital. And so you're picking up, you know, the higher acuity services there as well.
Okay. All right. I think that's about all that we have time for today. Thank you very much for coming.
Thanks, Stephen. Thank you.
It's great to see you.
Thanks so much. Thanks everyone for joining us.